IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Fiscal Policy Under Weak Political Institutions

Listed author(s):
  • Pierre Yared


    (Economics Massachusetts Institute of Technology)

Registered author(s):

    The purpose of this paper is to determine the normative and positive implications for fiscal policy in a weakly institutionalized economy which is not managed by a benevolent government, but is managed by a selfish dictator. We examine an economy with no capital, with fully state contingent financial instruments, and with exogenous stochastic government purchases. The dictator can use taxes and debt to extract rents, but dissatisfied households can threaten to replace him after his tenure with an equally selfish dictator. In contrast to the optimal tax rate under a benevolent government which is flat along the equilibrium path, we find that the optimal tax rate is history dependent and increasing along the equilibrium path. The reason is that the tax rate reflects the history of incentive compatibility constraints on the dictator. Providing the dictator with incentives to not steal imposes a limit on the size of government assets under his control and puts upward pressure on future tax rates, and in the long run, the tax rate reaches a maximum. Moreover, if we allow households to replace the dictator with a benevolent government at a cost, the tax rate can increase or decrease along the equilibrium path and can experience history dependence even in the long run. The reason is that providing incentives for the households to support the dictator imposes a limit on the size of government debt and puts downward pressure on future tax rates

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 259.

    in new window

    Date of creation: 03 Dec 2006
    Handle: RePEc:red:sed006:259
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:red:sed006:259. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.