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Efficiency of Flexible Budgetary Institutions

Author

Listed:
  • T. Renee Bowen

    () (Stanford University)

  • Ying Chen

    () (Johns Hopkins University)

  • Hulya Eraslan

    () (Rice University)

  • Jan Zapal

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

Abstract

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.

Suggested Citation

  • T. Renee Bowen & Ying Chen & Hulya Eraslan & Jan Zapal, 2015. "Efficiency of Flexible Budgetary Institutions," Koç University-TUSIAD Economic Research Forum Working Papers 1516, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1516
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    Citations

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    Cited by:

    1. Hans Gersbach & Philippe Muller & Oriol Tejada, 2017. "A Dynamic Model of Electoral Competition with Costly Policy Changes," CER-ETH Economics working paper series 17/270, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    2. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, vol. 167(C), pages 148-176.
    3. repec:eee:pubeco:v:160:y:2018:i:c:p:148-158 is not listed on IDEAS
    4. Bouton, Laurent & Lizzeri, Alessandro & Persico, Nicola, 2016. "The Political Economy of Debt and Entitlements," CEPR Discussion Papers 11459, C.E.P.R. Discussion Papers.
    5. Gersbach, Hans & Muller, Philippe & Tejada, Oriol, 2016. "The Effects of Higher Re-election Hurdles and Costs of Policy Change on Political Polarization," CEPR Discussion Papers 11375, C.E.P.R. Discussion Papers.
    6. Karakas, Leyla D., 2016. "Political turnover and the accumulation of democratic capital," European Journal of Political Economy, Elsevier, vol. 44(C), pages 195-213.
    7. repec:eee:pubeco:v:152:y:2017:i:c:p:93-101 is not listed on IDEAS
    8. Facundo Piguillem & Alessandro Riboni, 2018. "Fiscal Rules as Bargaining Chips," EIEF Working Papers Series 1804, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2018.

    More about this item

    Keywords

    budget negotiations; mandatory spending; discretionary spending; flexibility; sunset provisions; state contingency; endogenous status quo; dynamic efficiency.;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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