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Efficiency of Flexible Budgetary Institutions

Listed author(s):
  • T. Renee Bowen

    ()

    (Stanford University)

  • Ying Chen

    ()

    (Johns Hopkins University)

  • Hulya Eraslan

    ()

    (Rice University)

  • Jan Zapal

    ()

    (CERGE-EI, IAE-CSIC, and Barcelona GSE)

Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing appropriate flexibility in mandatory programs, we obtain static and dynamic efficiency. An endogenous choice of mandatory and discretionary programs, sunset provisions and state-contingent mandatory programs can provide this flexibility in increasingly complex environments.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1516.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1516.

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Length: 54 pages
Date of creation: Aug 2015
Handle: RePEc:koc:wpaper:1516
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