Essays on Political Constraints and Fiscal Policy
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This dissertation contributes to the literature on the relationship between political constraints and fiscal policy outcomes. In the first two chapters, we focus on the level of detail of a government’s budget, analyzing two budgetary institutions, the number of line-item appropriations and the number of appropriation bills. In the third chapter, we investigate commodity tax competition between two countries that differ in size and transportation cost. Finally, in the fourth chapter, we analyze investments in a state’s fiscal capacity, letting public goods accumulate. In Chapter 1, we analyze a budget’s level of detail, focusing on the number of line-item appropriations. The executive authority receives the right for discretionary spending via appropriation bills approved by the legislative authority. An appropriation bill is composed of line-item appropriations that restrict the allocation of the authorized budget. We take Baron and Ferejohn (1989) as a starting point to develop a model of legislative bargaining in which two legislators decide on the number of line-item appropriations, choosing between one- and two-item budgets, and on the provision of two public goods. A trade-off between flexibility and commitment emerges in choosing the number of line-item appropriations. While a low probability of polarization between legislators leads to a one-item budget, a high probability of polarization leads to a two-item budget. Moreover, a high probability of polarization between legislators increases government spending. We extend our model to analyze the line-item veto right and flexible line-item appropriations. In Chapter 2, we continue to investigate a budget’s level of detail, concentrating on the number of appropriation bills. In the first chapter, we assumed that the appropriation-bill count is fixed, but the number of line-items in a bill is flexible. In this chapter, we assume that an appropriation bill’s line-item count is fixed but the number of bills is flexible. Moreover, in the previous chapter, a budget’s level of detail and its size and composition are determined at the same time. In this chapter, a budget’s level of detail is determined first, and its size and composition are fixed subsequently. Specifically, two legislators first decide on the number of appropriation bills, choosing between one- and two-bill budgeting, and subsequently on the provision of two public goods. While two-bill budgeting is more costly, it offers the executive authority commitment opportunity. We show that when polarization between legislators is high, public-good provision is higher under twobill budgeting than under one-bill budgeting. Moreover, a high polarization and more equal distribution of political power between legislators encourages two-bill budgeting. We extend our model to analyze group-specific transfers. In Chapter 3, we analyze commodity tax competition between two countries. Kanbur and Keen (1993) and Nielsen (2001) offer two models to analyze commodity tax competition between two countries that differ in size. Nielsen’s model provides a simpler setting as it gives continuous best-response functions. In both models there always exists a unique equilibrium in pure strategies in which the larger country sets a higher tax rate. However, in both models transportation costs are assumed to be equal in two countries. We relax this assumption. We show that this leads to discontinuity of the best-response correspondences in Nielsen’s model. Moreover, existence of equilibrium in pure strategies is no longer guaranteed in either model. We give necessary and sufficient conditions for the existence of equilibrium in pure strategies in both models. Additionally, we show that, when an equilibrium in pure strategies does not exist, there can exist an equilibrium in mixed strategies in which the larger country sets a lower tax rate with a positive probability in both models. Finally, in Chapter 4, we turn our attention to a state’s capacity to raise taxes. Besley and Persson (2010) propose a model in which two groups in a society decide on government policy – taxes and provision of a public good – and investment in state capacity to collect taxes, also known as fiscal capacity. One of the authors’ main results is that an increase in the expected value of the public good increases investment in fiscal capacity. However, the authors assume that the public good depreciates completely in a period. As Battaglini and Coate (2007) state, most public goods accumulate over time. We add accumulation of the public good to the Besley-Persson model. We show that an increase in the expected value of the public good can decrease fiscal-capacity investment in this case. Moreover, an increase in the depreciation rate of the public good increases it.