Mandatory versus Discretionary Spending: The Status Quo Effect
AbstractDo mandatory spending programs such as Medicare improve efficiency? We analyze a model with two parties allocating a fixed budget to a public good and private transfers each period over an infinite horizon. We compare two institutions that differ in whether public good spending is discretionary or mandatory. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed. Mandatory programs result in higher public good spending; furthermore, they ex ante Pareto dominate discretionary programs when parties are patient, persistence of power is low, and polarization is low.
CitationBowen, T. Renee, Ying Chen, and Hülya Eraslan. 2014. "Mandatory versus Discretionary Spending: The Status Quo Effect." American Economic Review, 104 (10): 2941-74. DOI: 10.1257/aer.104.10.2941
- C78 Bargaining Theory; Matching Theory
- E62 Fiscal Policy
- H41 Public Goods
- H61 National Budget; Budget Systems