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American Economic Review: Vol. 98 No. 1 (March 2008)

AER Volume. 98, Issue 1 | Previous ArticleNext Article

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A Dynamic Theory of Public Spending, Taxation, and Debt

Article 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.98.1.201

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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Authors

Battaglini, Marco (Princeton U)
Coate, Stephen (Cornell U)

JEL Classifications

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