Working Paper: NBER ID: w22457
Authors: T. Renee Bowen; Ying Chen; Hlya K. Eraslan; Jan Zpal
Abstract: Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing appropriate flexibility in mandatory programs, we obtain static and dynamic efficiency. An endogenous choice of mandatory and discretionary programs, sunset provisions and state-contingent mandatory programs can provide this flexibility in increasingly complex environments.
Keywords: budgetary institutions; public goods; dynamic efficiency; mandatory programs; discretionary programs
JEL Codes: C73; C78; D61; D78; H61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Discretionary only and mandatory only budgetary institutions (H61) | dynamic inefficiency (D59) |
| Mandatory only institutions (D02) | static inefficiency (D61) |
| Introducing flexibility in mandatory programs (H53) | static and dynamic efficiency (D61) |
| Combination of mandatory and discretionary programs (H53) | static and dynamic efficiency (D61) |