Constitutional Design: Separation of Financing and Project Decision

CER-ETH - Center of Economic Research at ETH Zurich Working Paper No. 09/109

36 Pages Posted: 17 May 2009

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Volker Hahn

University of Konstanz

Stephan Imhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: May 2009

Abstract

We examine the provision of public projects under separate tax and subsidy rules. We find that tax rules separated from project cum subsidy decisions exhibit several advantages when incentive problems of the agenda-setter are taken into account. In particular, tax rules may prevent the proposal of inefficient projects which benefit only a small lobby group. We propose "redistribution efficiency" as a socially desirable property of proposals and find that tax rules always guarantee redistribution efficiency. We show that rules on subsidies combined with discretion regarding taxes always yield socially inferior proposals. Finally, tax rules induce the agenda-setter to look for potential improvements of public projects.

Keywords: constitutional design, provision of public projects, voting, taxes and subsidies

JEL Classification: D72, H40

Suggested Citation

Gersbach, Hans and Hahn, Volker and Imhof, Stephan, Constitutional Design: Separation of Financing and Project Decision (May 2009). CER-ETH - Center of Economic Research at ETH Zurich Working Paper No. 09/109. Available at SSRN: https://ssrn.com/abstract=1405333 or http://dx.doi.org/10.2139/ssrn.1405333

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
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+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Volker Hahn

University of Konstanz ( email )

Box 143
Konstanz, 78457
Germany

Stephan Imhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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