Optimal Fiscal Limits

Stephen Coate

No 20643, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the optimal design of fiscal limits in the context of a simple political economy model. The model features a single politician and a representative voter. The politician is responsible for choosing the level of public spending for the voter but may be biased in favor of spending. The voter sets a spending limit and requires that the politician have voter approval to exceed it. This limit must be set before the voter's preferences for public spending are fully known. The paper first solves for the optimal limit and explains how it depends upon the degree of politician bias and the nature of the uncertainty concerning the voter's preferred spending level. A dynamic version of the model is then analyzed and policies which limit the rate of growth of spending are shown to dominate those that cap spending to be below some fixed fraction of community income.

JEL-codes: H72 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-pbe
Note: PE POL
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