Efficiency of Flexible Budgetary Institutions

CERGE-EI Working Paper Series No. 570

58 Pages Posted: 13 Sep 2016

See all articles by T. Renee Bowen

T. Renee Bowen

University of California, San Diego; National Bureau of Economic Research; Center for Commerce and Diplomacy (CCD)

Ying Chen

Johns Hopkins University

Hulya Eraslan

Rice University

Jan Zapal

CERGE-EI; IAE-CSIC and Barcelona GSE

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2016

Abstract

Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing appropriate flexibility in mandatory programs, we obtain static and dynamic efficiency. An endogenous choice of mandatory and discretionary programs, sunset provisions and state-contingent mandatory programs can provide this flexibility in increasingly complex environments.

Keywords: budget negotiations, mandatory spending, discretionary spending, flexibility, endogenous status quo, dynamic efficiency

JEL Classification: C73, C78, D61, D78, H61

Suggested Citation

Bowen, T. Renee and Chen, Ying and Eraslan, Hulya and Zapal, Jan, Efficiency of Flexible Budgetary Institutions (September 1, 2016). CERGE-EI Working Paper Series No. 570, Available at SSRN: https://ssrn.com/abstract=2837345 or http://dx.doi.org/10.2139/ssrn.2837345

T. Renee Bowen (Contact Author)

University of California, San Diego ( email )

9500 Gilman Drive #0519
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HOME PAGE: http://https://sites.google.com/site/tamarareneebowenlyn/

National Bureau of Economic Research ( email )

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Center for Commerce and Diplomacy (CCD) ( email )

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HOME PAGE: http://https://ccd.ucsd.edu/

Ying Chen

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
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/

Jan Zapal

CERGE-EI ( email )

Politichych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://sites.google.com/site/jzapal/

IAE-CSIC and Barcelona GSE ( email )

Barcelona, 08193
Spain

HOME PAGE: http://sites.google.com/site/jzapal/

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