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Spending Biased Legislators - Discipline Through Disagreement

  • Facundo Piguillem

    (EIEF)

  • Alessandro Riboni

    (Ecole Polytechnique)

This paper studies politicians who have a present-bias for spending; they want to increase current spending and procrastinate spending cuts. We argue that legislators' bias is more severe in economies with low institutional quality. We show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend. Depending on the environment, legislators' decisions to be fiscally responsible may either complement or substitute other legislator's decisions. In economies with weak institutions, politicians' actions are strategic complements. Thus, institutional changes that induce fiscal responsibility are desirable, they generate a positive responsibility multiplier and reduce inefficient spending. However, in economies with better institutions, the same institutional change would induce some legislators to free ride on others' responsibility and may lead to more inefficient spending.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1317.

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Length: 41 pages
Date of creation: 2013
Date of revision: Jul 2013
Handle: RePEc:eie:wpaper:1317
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