Working Paper: NBER ID: w18204
Authors: Charles F. Manski
Abstract: Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels--thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.
Keywords: size of government; public spending; income taxation; decision making under ambiguity
JEL Codes: H11; H21; H54; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision criteria (C52) | public spending levels (H59) |
| planner's choices based on partial knowledge (D80) | public spending levels (H59) |
| public spending levels (H59) | societal welfare (I38) |
| decision criteria (C52) | planner's choices based on partial knowledge (D80) |