The political economy of public savings and the role of capital mobility (original) (raw)

Political Institutions and the Dynamics of Public Investment

2010

We present a theoretical model of the provision of a durable public good over an in…nite horizion. In each period, there is a societal endowment of which each of  districts owns a share. This endowment can either be invested in the public good or consumed. We characterize the planner's optimal solution and time path of investment and consumption. We then consider alternative political mechanisms for deciding on the time path, and analyze the Markov perfect equilibrium of these mechanisms. One class of these mechanisms involves a legislature where representatives of each district bargain with each other to decide how to divide the current period's societal endowment between investment in the public good and transfers to each district. The second class of mechanisms involves the districts making independent decisions for how to divide their own share of the endowment between consumption and investment. We conduct an experiment to assess the performance of these mechanisms, and compare the observed allocations to the Markov perfect equilibrium.

Remodeling the Competition for Capital

American Political Science Review, 2004

T his paper proposes and tests a new formal model of the competition for capital, using the analogy of a "tournament" as a substitute for the "race-to-the-bottom" model. Our key insight is that political costs that accompany legislating have both direct and indirect effects on the likelihood and scale of reforms. While countries with higher political costs are less likely themselves to enact reforms, the presence of these costs also reduces competing countries' incentives to reform regardless of their own political costs. Domestic politics therefore mitigates the pressures for downward convergence of tax policy despite increased capital mobility. We examine the capital tax policies in OECD countries during the period from 1980 to 1997 and find that states are sensitive to tax reforms in competitor countries, although their responses to reforms are mediated by their own domestic costs to reform. We define two potential sources of political costs of reform: transaction costs, due to the presence of multiple veto players in the legislative process, and constituency costs, due to ideological opposition to policy changes that benefit capital. Our evidence reveals that a reduction in these costs either domestically or abroad increases the likelihood that a country enacts tax reforms.

Redistributive Politics and Government Debt in a Borrowing-Constrained Economy

Bulletin of Economic Research, 2013

We develop a two-period, three-class of income model where low-income agents are borrowing constrained because of capital market imperfections, and where redistributive expenditure is financed by tax and government debt. When the degree of capital market imperfection is high, there is an ends-against-the-middle equilibrium where the constrained low-income and the unconstrained high-income agents favor low levels of government debt and redistributive expenditure; these agents form a coalition against the middle. In this equilibrium, the levels of government debt and expenditure might be below the efficient levels, and the spread of income distribution results in a lower debt-to-GDP ratio.

Political Competition and Public Debt

2016

There are two major preferences shaping political choices: one, regarding who should play the leading role in running the economy (markets or politicians) and the other, concerning social spending. According to reputation, leftist parties assign the leading role to politicians (i.e. the state), whereas rightist parties entrust markets with the central role in running the economy. Right-wing parties’ reputation of not favoring social spending is not backed by facts. Since both the left and the right display similar behaviors vis-à-vis social spending, it is preferable that markets play the central role in running the economy. Flexible markets help economic growth and employment, reducing the need for high social spending. The freedom of property and freedom from corruption indexes show that, in Romania, the market has never played the central role in running the economy. People’s prevailing concern over their wellbeing ‘now’ rather than ‘tomorrow’ generates competition among politica...

Fiscal Policy in a Growing Economy with Public Capital

Macroeconomic Dynamics, 1997

Public capital subject to congestion is introduced into an endogenous growth model and the transitional dynamic paths under alternative fiscal policies are characterized. Several new insights are obtained from this more general framework. During the transition, the two capital stocks always approach their common equilibrium growth rate from opposite directions. Government policy induces the more volatile response in the capital stock upon which it impinges most directly: private capital in the case of a tax, public capital in the case of expenditure. Finally, we characterize a time-varying income tax that enables the decentralized economy to replicate both the first-best transitional dynamics and steady-state equilibrium of a centrally planned economy. The steady-state component corrects for externalities that arise when government expenditure deviates from its social optimum, and the effects of congestion. The transitional component corrects for myopic behavior by the representative agent along the adjustment path.

Governmental activity and private capital adjustment

2006

We analyze within a dynamic model how rms decide on capital investment if the accompanying adjustment costs are a function of governmental activity. The government provides a public input and decides on the degree of rivalry. The productive public input enhances private capital productivity and reduces adjustment costs. We derive the equilibrium in which capital and investment ratio are both

Social Capital and Government in the Production of Public Goods

2003

As a response to the rapidly growing empirical literature on social capital and the evidence of its correlation with government performance, we build a theoretical framework to study the interactions between social capital and government's action. This paper presents a model of homogeneous agents in an overlapping generations framework incorporating social capital as the values transmitted from parent to child. The government's role is to provide public goods. First, government expenditure is exogenously given. Then, it will be chosen at the preferred level of the representative agent. For both setups the equilibrium outcomes are characterized and the resulting dynamics studied. Briefly we include an analysis of the effect of productivity growth on the evolution of social capital. The results obtained caution caution against both the crowding out effect of the welfare state and the impact of sustained economic growth on social capital. JEL classification: H41; Z13