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
Date Written: August 20, 2013
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: Suggested Citation