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Mandatory Versus Discretionary Spending: The Status Quo Effect

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  • T. Renee Bowen

    (Stanford University)

  • Ying Chen

    (Arizona State University)

  • Hulya Eraslan

    (Johns Hopkins University)

Abstract

Do mandatory spending programs such as Medicare improve efficiency? We analyze a model with two parties allocating a fixed budget to a public good and private transfers each period over an infinite horizon. We compare two institutions that differ in whether public good spending is discretionary or mandatory. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed. Mandatory programs result in higher public good spending; furthermore, they ex ante Pareto dominate discretionary programs when parties are patient, persistence of power is low, and polarization is low.

Suggested Citation

  • T. Renee Bowen & Ying Chen & Hulya Eraslan, 2012. "Mandatory Versus Discretionary Spending: The Status Quo Effect," Koç University-TUSIAD Economic Research Forum Working Papers 1229, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1229
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    as
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    More about this item

    Keywords

    budget negotiations; mandatory programs; dynamic bargaining; endogenous status quo; public goods;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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