Working Paper: CEPR ID: DP10440
Authors: Hans Peter Grüner
Abstract: This paper shows that a simple two-stage voting mechanism may implement a constrained optimal state dependent decision about the size of the fiscal deficit. I consider a setup with strategic fiscal deficits à la Tabellini and Alesina (1990). Three groups of voters are informed about the productivity of current public spending. Voters differ in their preferences for public goods and swing voters' preferences may change over time. The current government decides on the current spending mix and it has an incentive to strategically overspend. Under certain conditions, a simple two-stage mechanism in which a deficit requires the approval by a supermajority in parliament implements a constrained optimal decision. When the current majority is small, political bargaining may further increase social welfare. However, when the current majority is large, a supermajority mechanism with bargaining leads to a biased spending mix and reduces welfare whereas the laissez faire mechanism may yield the first best. An appropriately adjusted majority threshold can deal with this problem.
Keywords: Constitutional Choice; Fiscal Policy Rules; Mechanism Design
JEL Codes: D82; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of parliamentary majority (D72) | effectiveness of supermajority mechanism in achieving optimal fiscal outcomes (D72) |
| supermajority requirement for deficit approval (H62) | prevention of excessive spending (H61) |
| political bargaining (D72) | increase in social welfare (H53) |
| structured announcement procedure + supermajority requirement (G34) | state-dependent collective choice that aligns with optimal spending levels (D79) |
| constitutional rules (K10) | fiscal discipline (E62) |
| laissez-faire constitution (K10) | excessive spending on public goods (H40) |