Optimal Policy Reforms

Katy Bergstrom, William Dodds and Juan Rios

No 12883, CESifo Working Paper Series from CESifo

Abstract: This paper develops a general framework to construct optimal policy reforms allowing for fiscal spillovers onto other policymakers. The optimal reform direction depends on a single sufficient statistic for each policy, the welfare per internal cost (WPIC), which measures the welfare gain per dollar spent by the policymaker accounting for the welfare impacts of fiscal spillovers onto other policymakers. The WPIC collapses to the (welfare-weighted) marginal-value-of-public-funds if there are no fiscal spillovers and to the (welfare-weighted) net-social-benefit-per-dollar if behavioral costs accrue externally. We provide numerical examples illustrating that fiscal spillovers can meaningfully change the optimal reform direction.

Keywords: optimal reforms; fiscal spillovers; welfare per internal cost; marginal value of public funds; net social benefit; sufficient statistics (search for similar items in EconPapers)
JEL-codes: H20 H30 H50 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12883

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