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Asymmetric Information, Government Fiscal Policies, and Financial Development

Author

Listed:
  • Fu-Sheng Hung

    (National Taipei University, Taiwa)

  • Chien-Chiang Lee

    (National Sun Yat-Sen University, Taiwan, cclee@cm.nsysu.edu.tw)

Abstract

Previous studies assert that the optimal share of public spending is equal to the output elasticity of public spending and that relying on capital income taxation to finance public spending is either beneficial or harmful to capital accumulation and economic growth. The authors incorporate asymmetric information into an endogenous growth model and reexamine how the presence of asymmetric information in financial markets affects the consequences of the government’s expenditure and financing policies. With this asymmetric information, the authors find an optimal tax rate for capital income and an optimal share of government spending that maximize economic growth. These two optimal levels are more reasonable in comparison with recent empirical works. The authors find that financial development, measured by a decrease in the information cost, is positively correlated with the optimal share of government spending and the optimal tax rate for capital income. Some preliminary evidence in support of these implications is also found.

Suggested Citation

  • Fu-Sheng Hung & Chien-Chiang Lee, 2010. "Asymmetric Information, Government Fiscal Policies, and Financial Development," Economic Development Quarterly, , vol. 24(1), pages 60-73, February.
    • Handle: RePEc:sae:ecdequ:v:24:y:2010:i:1:p:60-73
    DOI: 10.1177/0891242409333548
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    References listed on IDEAS

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    2. Taha, Roshaiza & Colombage, Sisira R.N. & Maslyuk, Svetlana & Nanthakumar, Loganathan, 2013. "Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach," Journal of Asian Economics, Elsevier, vol. 24(C), pages 147-157.
    3. Olumide Olusegun Olaoye & Phillip A. Olomola, 2023. "Sub‐Saharan Africa's rising public debt stock: Is there a cause for concern?," South African Journal of Economics, Economic Society of South Africa, vol. 91(1), pages 85-115, March.
    4. Olaoye, Olumide Olusegun & Olomola, P.A., 2022. "Empirical analysis of asymmetry phenomenon in the public debt structure of Sub-Saharan Africa's five biggest economies: A Markov-Switching model," The Journal of Economic Asymmetries, Elsevier, vol. 25(C).
    5. Naeem Akram, 2016. "Do Financial Sector Activities Affect Tax Revenue in Pakistan?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 21(2), pages 153-169, July-Dec.

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