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Fiscal restraints and voter welfare

  • Timothy Besley
  • Michael Smart

This paper explores the logic of fiscal restraints in a political agency model with both moral hazard and adverse selection. The role of the political process is both to discipline incumbents who may act against the public interest and to sort in those politicians who are most likely act in voters’interests. We use the model to examine the optimality of ine¢ cient taxation, limits on the size of government, increasing trans- parency, and yardstick competition. Some conclusions are surprising. For example, we show that some forms of fiscal restraint can only be desirable when incumbents are su¢ ciently likely to be benevolent.

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File URL: http://eprints.lse.ac.uk/3769/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3769.

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Length: 30 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:ehl:lserod:3769
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
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Web page: http://www.lse.ac.uk/

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  4. BELLEFLAMME, Paul & HINDRIKS, Jean, 2002. "Yardstick competition and political agency problems," CORE Discussion Papers 2002029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  6. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
  7. John Douglas Wilson, 1989. "An Optimal Tax Treatment Of Leviathan," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 97-117, 07.
  8. Andrea Prat, 2002. "The Wrong Kind of Transparency," STICERD - Theoretical Economics Paper Series 439, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. James Buchanan & Roger Congleton, 1979. "Proportional and progressive income taxation with utility-maximizing governments," Public Choice, Springer, vol. 34(2), pages 217-230, June.
  10. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
  13. Revelli, Federico, 2002. "Local taxes, national politics and spatial interactions in English district election results," European Journal of Political Economy, Elsevier, vol. 18(2), pages 281-299, June.
  14. Robert Barro, 1973. "The control of politicians: An economic model," Public Choice, Springer, vol. 14(1), pages 19-42, March.
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  16. SALMON, Pierre, 1987. "Decentralization as an incentive scheme," Institut des Mathématiques Economiques – Document de travail de l’I.M.E. (1974-1993) 98, Institut des Mathématiques Economiques. LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS, Université de Bourgogne.
  17. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
  18. James E. Alt & David Dreyer Lassen, 2003. "Fiscal Transparency and Fiscal Policy Outcomes in OECD Countries," EPRU Working Paper Series 03-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  19. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
  20. Massimo Bordignon & Floriana Cerniglia & Federico Revelli, 2002. "In Search for Yardstick Competition: Property Tax Rates and Electoral Behavior in Italian Cities," CESifo Working Paper Series 644, CESifo Group Munich.
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  22. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  23. North, Douglass C., 1985. "The growth of government in the United States: An economic historian's perspective," Journal of Public Economics, Elsevier, vol. 28(3), pages 383-399, December.
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