TY  - JOUR
AU  - Battaglini,Marco
AU  - Coate,Stephen
TI  - A Dynamic Theory of Public Spending, Taxation and Debt
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12100
PY  - 2006
Y2  - March 2006
UR  - http://www.nber.org/papers/w12100
L1  - http://www.nber.org/papers/w12100.pdf
N1  - Author contact info:
Marco Battaglini
Department of Economics
Fisher Hall
Princeton University
Princeton, NJ 08544
Tel: 609/258-4002
Fax: 609/258-6419
E-Mail: mbattagl@princeton.edu

Stephen Coate
Department of Economics
Cornell University
Uris Hall
Ithaca, NY 14853-7601
Tel: 607/255-1912
Fax: 215/573-2057
E-Mail: sc163@cornell.edu
M2  - featured in NBER digest on 2006-03-20
AB  - This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts.  The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: %u201Cbusiness-as-usual%u201D in which legislators bargain over the allocation of pork, and %u201Cresponsible-policy-making%u201D in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare.
ER  -