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Fiscal Rules as Bargaining Chips

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Alessandro Riboni

    (Ecole Polytechnique)

Abstract
Most fiscal rules can be overridden by consensus. We show that the possibility of override does not make fiscal rules ineffectual. Fiscal rules can lead the party in power to offer spending concessions to the opposition to avoid their application. Since fiscal rules determine the outside option in case of disagreement, the opposition uses fiscal rules as “bargaining chips”. This reduces the incentive for inefficient debt accumulation. We analyze three standard fiscal rules: government shutdown, budget balance and mandatory spending, and show that when political polarization is high, a government shutdown provision maximizes the bargaining power of the opposition and leads to a sizeable reduction of debt. When the degree of polarization is low, a balanced budget rule is preferable. Mandatory spending eliminates the incentive to over-accumulate debt by reducing political risk. However, it gives a considerable advantage to the initial incumbent, generating large and persistent static inefficiencies.

Suggested Citation

  • Facundo Piguillem & Alessandro Riboni, 2018. "Fiscal Rules as Bargaining Chips," 2018 Meeting Papers 732, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:732
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    Cited by:

    1. Pierre C. Boyer & Brian Roberson & Christoph Esslinger, 2024. "Public Debt and the Political Economy of Reforms," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 459-491, August.
    2. 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.
    3. 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.
    4. Delgado-Vega, Álvaro, 2024. "Persistence in power of long-lived parties," European Economic Review, Elsevier, vol. 163(C).
    5. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    6. Carsten Hefeker & Michael Neugart, 2024. "Policy rules and political polarization," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 26(4), August.
    7. Arawatari, Ryo & Ono, Tetsuo, 2021. "Public debt rule breaking by time-inconsistent voters," European Journal of Political Economy, Elsevier, vol. 69(C).
    8. Uchida, Yuki & Ono, Tetsuo, 2021. "Borrowing to finance public investment: a politico-economic analysis of fiscal rules," MPRA Paper 115844, University Library of Munich, Germany, revised 31 Dec 2022.
    9. Pagenhardt, Laura & Große Steffen, Christoph & Rieth, Malte, 2021. "Commited to Flexible Fiscal Rules," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242330, Verein für Socialpolitik / German Economic Association.
    10. Zapal, Jan, 2020. "Simple Markovian equilibria in dynamic spatial legislative bargaining," European Journal of Political Economy, Elsevier, vol. 63(C).
    11. Maximilian Kellner, 2023. "Strategic effects of stock pollution: the positive theory of fiscal deficits revisited," Public Choice, Springer, vol. 194(1), pages 157-179, January.
    12. RYO ARAWATARI & Tetsuo Ono, 2024. "Optimal Fiscal Spending and Deviation Rules under Political Uncertainty," Discussion Papers in Economics and Business 24-03, Osaka University, Graduate School of Economics.
    13. Ryo Arawatari & Tetsuo Ono, 2023. "International coordination of debt rules with time‐inconsistent voters," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 29-60, February.
    14. Ethan Ilzetzki & Heidi Christina Thysen, 2024. "Fiscal Rules and Market Discipline," Discussion Papers 2409, Centre for Macroeconomics (CFM).
    15. Jocelyne Zoumenou, 2023. "On the impact of fiscal policy on inflation: The case of fiscal rules," EconomiX Working Papers 2023-21, University of Paris Nanterre, EconomiX.
    16. Marina Azzimonti & Gabriel P. Mihalache & Laura Karpuska, 2020. "Bargaining over Taxes and Entitlements," NBER Working Papers 27595, National Bureau of Economic Research, Inc.
    17. Căpraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2022. "Do independent fiscal institutions cause better fiscal outcomes in the European Union?," Economic Systems, Elsevier, vol. 46(2).

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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