Inefficiency in Legislative Policy-Making: A Dynamic Analysis

Abstract

This paper develops an infinite horizon model of public spending and taxation in which policydecisions are determined by legislative bargaining. The policy space incorporates both productiveand distributive public spending and distortionary taxation. The productive spending is investing ina public good that benefits all citizens (e.g., national defense or air quality) and the distributivespending is district-specific transfers (e.g., pork barrel spending). Investment in the public goodcreates a dynamic linkage across policy-making periods. The analysis explores the dynamics oflegislative policy choices, focusing on the efficiency of the steady state level of taxation andallocation of tax revenues. The model sheds new light on the efficiency of legislative policy-makingand has a number of novel positive implications.