Mandatory versus Discretionary Spending: The Status Quo Effect

Stanford Graduate School of Business Research Paper No. 2121

75 Pages Posted: 25 Oct 2012 Last revised: 22 Aug 2013

See all articles by T. Renee Bowen

T. Renee Bowen

Stanford University - Graduate School of Business

Ying Chen

Johns Hopkins University - Department of Economics

Hulya Eraslan

Rice University

Date Written: August 20, 2013

Abstract

Do mandatory spending programs such as Medicare improve efficiency? We analyze a model with two parties allocating a fixed budget to a public good and private transfers each period over an infinite horizon. We compare two institutions that differ in whether public good spending is discretionary or mandatory. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed. Mandatory programs result in higher public good spending; furthermore, they ex ante Pareto dominate discretionary programs when parties are patient, persistence of power is low, and polarization is low.

Keywords: budget negotiations, mandatory spending, discretionary spending, dynamic bargaining, endogenous status quo, public goods

JEL Classification: C73, D61, D78

Suggested Citation

Bowen, T. Renee and Chen, Ying and Eraslan, Hulya, Mandatory versus Discretionary Spending: The Status Quo Effect (August 20, 2013). Stanford Graduate School of Business Research Paper No. 2121. Available at SSRN: https://ssrn.com/abstract=2166601 or http://dx.doi.org/10.2139/ssrn.2166601

T. Renee Bowen (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Ying Chen

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Hulya Eraslan

Rice University ( email )

Department of Economics MS-22
Rice University P.O Box 1892
Houston, TX Texas 77251-1892
United States
7133483453 (Phone)

HOME PAGE: http://he6.web.rice.edu/

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