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Efficiency of Flexible Budgetary Institutions

Author

Listed:
  • Bowen, T. Renee

    (Stanford University)

  • Chen, Ying

    (Johns Hopkins University)

  • Eraslan, Hulya

    (Rice University)

  • Zapal, Jan

    (CERGE-EI, Prague and Barcelona GSE)

Abstract
Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We model a budgetary institution as the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is periodic appropriations that are not allocated if no new agreement is reached. We show that discretionary only institutions lead to dynamic inefficiencies and mandatory only institutions can lead to both dynamic and static inefficiencies. By introducing flexibility into budgetary institutions, either through a combination of mandatory and discretionary spending, or through a state-contingent mandatory program, we obtain static and dynamic efficiency.

Suggested Citation

  • Bowen, T. Renee & Chen, Ying & Eraslan, Hulya & Zapal, Jan, 2015. "Efficiency of Flexible Budgetary Institutions," Research Papers 3185, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3185
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    3. Helios Herrera & Antonin Macé & Matias Nùnez, 2023. "Political Brinkmanship and Compromise," PSE Working Papers halshs-03225030, HAL.
    4. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, vol. 167(C), pages 148-176.
    5. Facundo Piguillem & Alessandro Riboni, 2021. "Fiscal Rules as Bargaining Chips [Growth in the Shadow of Expropriation]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2439-2478.
    6. Hülya Eraslan & Kirill S. Evdokimov & Jan Zápal, 2022. "Dynamic Legislative Bargaining," Springer Books, in: Emin Karagözoğlu & Kyle B. Hyndman (ed.), Bargaining, chapter 0, pages 151-175, Springer.
    7. Marina Azzimonti & Laura Karpuska & Gabriel Mihalache, 2023. "Bargaining Over Taxes And Entitlements In The Era Of Unequal Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 893-941, August.
    8. Grechyna, Daryna, 2021. "Mandatory spending, political polarization, and macroeconomic volatility," European Journal of Political Economy, Elsevier, vol. 68(C).
    9. Hans Gersbach & Philippe Muller & Oriol Tejada, 2017. "A Dynamic Model of Electoral Competition with Costly Policy Changes," CER-ETH Economics working paper series 17/270, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    10. Gersbach, Hans & Muller, Philippe & Tejada, Oriol, 2019. "Costs of change and political polarization," European Journal of Political Economy, Elsevier, vol. 60(C).
    11. Austen-Smith, David & Dziuda, Wioletta & Harstad, Bård & Loeper, Antoine, 2019. "Gridlock and inefficient policy instruments," Theoretical Economics, Econometric Society, vol. 14(4), November.
    12. Gersbach, Hans & Jackson, Matthew O. & Muller, Philippe & Tejada, Oriol, 2023. "Electoral competition with costly policy changes: A dynamic perspective," Journal of Economic Theory, Elsevier, vol. 214(C).
    13. John Duffy & SunTak Kim, 2024. "Public good bargaining under mandatory and discretionary rules: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 27(1), pages 175-214, March.
    14. Karakas, Leyla D., 2016. "Political turnover and the accumulation of democratic capital," European Journal of Political Economy, Elsevier, vol. 44(C), pages 195-213.
    15. Gersbach, Hans & Tejada, Oriol, 2018. "A Reform Dilemma in polarized democracies," Journal of Public Economics, Elsevier, vol. 160(C), pages 148-158.
    16. Zapal, Jan, 2020. "Simple Markovian equilibria in dynamic spatial legislative bargaining," European Journal of Political Economy, Elsevier, vol. 63(C).
    17. Turishcheva Tatyana (Турищева Т.Б.), 2020. "Monitoring And Evaluating The Effectiveness Of Budget Programs As Components Of The Resource Cycle Of An Autonomous Institution [Мониторинг И Оценка Эффективности Бюджетных Программ Как Составляющи," State and Municipal Management Scholar Notes, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 154-158.
    18. Marina Azzimonti & Gabriel P. Mihalache & Laura Karpuska, 2020. "Bargaining over Taxes and Entitlements," NBER Working Papers 27595, National Bureau of Economic Research, Inc.
    19. Loeper, Antoine & Dziuda, Wioletta, 2024. "Voters and the trade-off between policy stability and responsiveness," Journal of Public Economics, Elsevier, vol. 232(C).
    20. Gersbach, Hans & Jackson, Matthew O. & Tejada, Oriol, 2020. "The Optimal Length of Political Terms," CEPR Discussion Papers 14857, C.E.P.R. Discussion Papers.
    21. Karakas, Leyla D., 2017. "Institutional constraints and the inefficiency in public investments," Journal of Public Economics, Elsevier, vol. 152(C), pages 93-101.
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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