A Relook at Output-Reducing Government Expenditure

21 Pages Posted: 1 Aug 2013 Last revised: 10 Jun 2014

Date Written: July 29, 2013

Abstract

Perceived wisdom typically corroborates ‘useful’ Keynesian-type of public spending to be welfare-improving if output (or GDP) increases, i.e. a positive fiscal multiplier. I show a contrarian result which suggests that welfare can increase despite a fall in output due to fiscal expenditure. The conditions which drive this outcome are the production of differentiated products under increasing returns to scale and spare labour capacity in the economy.

Keywords: Negative multiplier, lump-sum and employment subsidies, labour supply, income tax, monopolistic competition

JEL Classification: E62, H2, J2

Suggested Citation

Kwan, Chang Yee, A Relook at Output-Reducing Government Expenditure (July 29, 2013). Lee Kuan Yew School of Public Policy Research Paper No. 13-07. Available at SSRN: https://ssrn.com/abstract=2304519 or http://dx.doi.org/10.2139/ssrn.2304519

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