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Interest groups or incentives: the political economy of fiscal decay

  • Goyal, Ashima
  • Paul, Manas

One view is that concessions demanded by and granted to interests groups are responsible for steady fiscal decline, and delay in reforms. We argue that negative supply shocks combined with the political objective of protecting the poor can build in incentives leading to these results. Pricing rules for government services, generated in such circumstances, would be equivalent to a fixed price contract that left the government with negative rent. A decline in investment in and quality of government services would follow, since price controls in the presence of cost shocks would lead to systematic incentives to lower quality and investment. Tax capacity and the ability to reduce poverty in the future would fall. The framework helps to understand the Indian experience. Time series based tests of causality support the causal priority of positive cost shocks. If it is accepted that incentives, and not only interest groups are responsible for fiscal decay, a concerted attempt to rationalize user charges and improve quality may be politically feasible.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29198.

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Date of creation: 2004
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Handle: RePEc:pra:mprapa:29198
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  1. Goyal, Ashima, 1999. "The Political Economy of the Revenue Deficit," MPRA Paper 29980, University Library of Munich, Germany.
  2. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  3. Hiro Y. Toda & Peter C.B. Phillips, 1991. "Vector Autoregression and Causality," Cowles Foundation Discussion Papers 977, Cowles Foundation for Research in Economics, Yale University.
  4. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  6. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  7. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-77, December.
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