Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation

Charles Manski

No 18204, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels--thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.

JEL-codes: H11 H21 H54 J22 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-pbe and nep-tre
Note: PE
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Published as Charles F. Manski, 2014. "Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation," Economic Journal, Royal Economic Society, vol. 0(576), pages 359-376, 05.

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