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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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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
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  1. Salmon, Pierre, 1987. "Decentralisation as an Incentive Scheme," Oxford Review of Economic Policy, Oxford University Press, vol. 3(2), pages 24-43, Summer.
  2. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
  3. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681.
  4. Sam Peltzman, 1980. "The Growth of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 1, Chicago - Center for Study of Economy and State.
  5. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers.
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  7. 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.
  8. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
  9. 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.
  10. Martin Bodenstein & Heinrich Ursprung, 2005. "Political yardstick competition, economic integration, and constitutional choice in a federation:," Public Choice, Springer, vol. 124(3), pages 329-352, September.
  11. John Douglas Wilson, 1989. "An Optimal Tax Treatment Of Leviathan," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 97-117, 07.
  12. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  13. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
  14. Robert Barro, 1973. "The control of politicians: An economic model," Public Choice, Springer, vol. 14(1), pages 19-42, March.
  15. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  16. Paul Belleflamme & Jean Hindriks, 2005. "Yardstick competition and political agency problems," Social Choice and Welfare, Springer, vol. 24(1), pages 155-169, 09.
  17. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
  18. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  19. 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.
  20. 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.
  21. James Buchanan & Roger Congleton, 1979. "Proportional and progressive income taxation with utility-maximizing governments," Public Choice, Springer, vol. 34(2), pages 217-230, June.
  22. 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.
  23. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
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