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Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation

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  • Charles F. Manski

Abstract

Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels--thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.

Suggested Citation

  • Charles F. Manski, 2012. "Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation," NBER Working Papers 18204, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18204
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    References listed on IDEAS

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    1. Charles F. Manski, 2011. "Choosing Treatment Policies Under Ambiguity," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 25-49, September.
    2. Charles F. Manski, 2006. "Search Profiling With Partial Knowledge of Deterrence," Economic Journal, Royal Economic Society, vol. 116(515), pages 385-401, November.
    3. William A. Brock & Charles F. Manski, 2011. "Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 441-459, March.
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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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