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A Dynamic Theory of Public Spending, Taxation, and Debt

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Author Info
Marco Battaglini
Stephen Coate

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Abstract

This paper presents a political economy theory of fiscal policy. Policy choices are made by a legislature that can raise revenues via an income tax and by borrowing. Revenues can be used to finance a public good, whose value is stochastic, and pork-barrel spending. Policymaking cycles between a "business- as-usual" regime in which legislators bargain over pork, and a "responsible policymaking" regime in which policies maximize the collective good. Transitions between regimes are brought about by shocks in the value of the public good. Equilibrium tax rates are too high, public good provision is too low, and debt levels are too high. (JEL D72, E62, H20, H50, H60)

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File URL: http://hdl.handle.net/10.1257/aer.98.1.201
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 201-36
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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:201-36

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Davide Debortoli & Ricardo Nunes, 2008. "Political disagreement, lack of commitment and the level of debt," International Finance Discussion Papers 938, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Marsiliani, Laura & Renström, Thomas I, 2007. "Political Institutions and Economic Growth," CEPR Discussion Papers 6143, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Marco Battaglini & Stephen Coate, 2008. "Fiscal Policy over the Real Business Cycle: A Positive Theory," NBER Working Papers 14047, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. John Duggan & Tasos Kalandrakis, 2007. "Dynamic Legislative Policy Making," Wallis Working Papers WP45, University of Rochester - Wallis Institute of Political Economy. [Downloadable!]
  5. Ilzetzki, Ethan, 2006. "Rent seeing distortions and fiscal procyclicality," MPRA Paper 8726, University Library of Munich, Germany, revised 01 Dec 2007. [Downloadable!]
  6. Marco Battaglini & Thomas Palfrey, 2007. "The Dynamics of Distributive Politics," Discussion Papers 1451, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  7. Laura Marsiliani & Thomas Renström, 2007. "Political institutions and economic growth," Economics of Governance, Springer, vol. 8(3), pages 233-261, May. [Downloadable!] (restricted)
  8. Vincent Anesi, 2007. "Noncooperative Foundations of Stable Sets in Voting Games," Discussion Papers 2007-09, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
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