Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation

39 Pages Posted: 7 Jul 2012 Last revised: 17 Jul 2012

See all articles by Charles F. Manski

Charles F. Manski

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: July 2012

Abstract

Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels--thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.

Suggested Citation

Manski, Charles F., Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation (July 2012). NBER Working Paper No. w18204, Available at SSRN: https://ssrn.com/abstract=2101932

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