Working Paper: NBER ID: w12332
Authors: Gene M. Grossman; Elhanan Helpman
Abstract: We study budget formation in a model featuring separation of powers. In our model, the legislature designs a budget bill that can include a cap on total spending and earmarked allocations to designated public projects. Each project provides random benefits to one of many interest groups. The legislature can delegate spending decisions to the executive, who can observe the productivity of all projects before choosing which to fund. However, the ruling coalition in the legislature and the executive serve different constituencies, so their interests are not perfectly aligned. We consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches, and associate these with the political systems and circumstances under which they most naturally arise. Earmarks are more likely to occur when the executive serves broad interests, while a binding budget cap arises when the executive's constituency is more narrow than that of the powerful legislators.
Keywords: separation of powers; budget process; public spending; political institutions
JEL Codes: H61; D78; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| breadth of the executive's constituency (broad interests) (D72) | earmarks (H61) |
| breadth of the executive's constituency (broad interests) (D72) | budget cap that binds (H60) |
| narrower constituency of the executive than the legislature (D72) | budget with a cap that binds (H60) |
| overlapping interests (D74) | executive prefers to spend more on shared groups (D72) |
| overlapping interests (D74) | legislature imposes constraints to limit spending (H72) |