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Expert Politicians, Electoral Control, and Fiscal Restraints

  • Uwe Dulleck

    ()

    (QUT)

  • Berthold U Wigger

    ()

    (Karlsruhe Institute of Technology)

Fiscal restraints have been argued to force today's governments to internalize the externalities that result from extensive borrowing on future electorates and governments as well as on other countries by causing fiscal instability. In this article we provide an alternative argument for fiscal restraints which is based on an agency perspective on government. A budget maximizing politician is better informed than the electorate about the necessary spending to ensure the states ability to provide services for the economy. In this respect, the politician is an expert in the meaning of the credence good literature. The electorate, being able to observe the budget but not the necessary level of spending, will reelect a government if its budget does not exceed a critical level. A fiscal restraint limits the maximum spending a government will choose if the reelection level is not sufficient to ensure the state's ability to provide services to the economy. We determine when such a fiscal restraint improves voter welfare and discuss the role of the opposition in situations where very high levels of spending are required.

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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 79.

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Length: 33 pages
Date of creation: 13 Feb 2012
Date of revision:
Handle: RePEc:qut:auncer:2012_2
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Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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  1. Dulleck, Uwe & Rudolf, Kerschbamer & Matthias, Sutter, 2009. "The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition," Working Papers in Economics 348, University of Gothenburg, Department of Economics.
  2. Timothy Besley & Michael Smart, 2005. "Fiscal restraints and voter welfare," LSE Research Online Documents on Economics 3769, London School of Economics and Political Science, LSE Library.
  3. Aidt, T.S. & Veiga, F.J. & Veiga, L.G., 2009. "Election Results and Opportunistic Policies: A New Test of the Rational Political Business Cycle Model," Cambridge Working Papers in Economics 0934, Faculty of Economics, University of Cambridge.
  4. Torsten Persson & Gérard Roland & Guido Tabellini, 1997. "Separation of Powers and Political Accountability," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1163-1202.
  5. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  6. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  7. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
  8. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
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