Political Economy of Fiscal Institutions

Abstract

Abstract:We discuss two essential problems of the political economy of public finances: The principal agent problem between voters and elected politicians and the common pool problem arising from the fact that money drawn from a general tax fund is used to pay for policies targeting more or less narrow groups in society. Three institutional mechanisms exist to deal with these problems, ex-ante rules controlling the behavior of elected policy makers, electoral rules creating accountability of and competition among policy makers, and budgeting processes internalizing the common pool externality. We review recent theoretical and empirical research and discuss its implications for research and institutional design.

Clientelistic budget cycles: evidence from health policy in the Italian regions

“…However, this work does not fully square with studies that find significant PBCs in the European Union (Buti and van den Noord 2004;Efthyvoulou 2012;Mink and de Haan 2006;von Hagen 2006), in Oganization for Economic Co-operation and Development (OECD) countries (Tujula and Wolswijk 2007), and in older as well as newer democracies (Klomp and de Haan 2013).…”

From Budgetary Forecasts to Ex Post Fiscal Data: Exploring the Evolution of Fiscal Forecast Errors in the European Union

“…Subsequent work has also shown how higher deficits can be the outcome of common pool problems, for example, because they give rise to a voracity effect through which positive output shocks result in more than proportionate redistribution (Tornell and Lane 1999; Lane 2003) or wars of attrition (Alesina and Drazen 1991). Von Hagen (2006) provides a recent overview of the relevant literature. As a measure of size fragmentation we use the variable GOVTYPE t , which is an index running from 1 (a single party majority government) to 6 (a temporary caretaker government).…”

A Long Goodbye to Bismarck? : The Politics of Welfare Reform in Continental Europe

“…Financial questions in tax-financed welfare states are dealt with in the annual budget process, decided by the cabinet and with a more or less influential role of the minister of Finance (Hagen 2006;Hallerberg and Hagen 1999;Hallerberg, Strauch and Hagen 2001;Hallerberg 2004). By contrast, in contribution-financed welfare states, the minister of Finance usually not only has no formal right to be heard in questions concerning welfare state finance, but -more importantly -also has no immediate fiscal interest in the 'social budget' .…”