American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
A Dynamic Theory of Public Spending, Taxation, and Debt
American Economic Review
vol. 98,
no. 1, March 2008
(pp. 201–36)
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)Citation
Battaglini, Marco, and Stephen Coate. 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt." American Economic Review, 98 (1): 201–36. DOI: 10.1257/aer.98.1.201Additional Materials
JEL Classification
- D72 Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
- E62 Fiscal Policy
- H20 Taxation, Subsidies, and Revenue: General
- H50 National Government Expenditures and Related Policies: General
- H60 National Budget, Deficit, and Debt: General