Bowen, chen __eraslan

1. Mandatory vs Discretionary Spending By T. Renee Bowen, Ying Chen and Hulya Eraslan Econ 681 Political Economy - Spring 2013 April 24, 2013 Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 1 / 32

2. Main Question Do mandatory spending programs improve eﬃciency compared to discretionary programs ? Methodological question : What is the impact of an endogenous status quo on the policy decisions of political parties ? Main Result in a nutshell : Mandatory Programs result in higher public good spending and they ex-ante pareto dominate discretionary programs under certain parametric assumptions of the model. A possible positive explanation of why so many countries have enacted mandatory spending programs. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 2 / 32

6. Motivation The authors are interested in the role of mandatory spending programs in driving budget negotiations and the implications for provision of public goods. Mandatory programs vs Discretionary programs. A breakdown of discretionary spending A closer look at Mandatroy programs and their magnitude Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 3 / 32

9. The model & political system The parties decide how to allocate an exogenously given budget to spending on a public good and private transfers to each party in every period over an infinite horizon. Parties differ in the value they attach to the public good : A measure of polarization. Each period a party is randomly selected to make a proposal : A way to capture persistence of power The proposer makes a take it or leave it offer, if accepted the proposal is implemented otherwise the status quo prevails. What are the institutions that govern the status quo ? Exogenous status quo, public good spending is equal to 0 each period; discretionary spending. Endogenous status quo, public spending is equal to the one implemented last period; mandatory spending. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 4 / 32

15. The model & political system Status quo allocation to private transfers is zero under both institutions. Under discretionary spending, in the unique markov perfect equilibrium, the party in power under-provides the public good and extracts the maximum possible private transfer for itself. The reasons : No dynamic linkages under discretionary spending, no bargaining power of the responding party. Thus the level of public good spending changes only when the party in power changes Under mandatory spending, equilibrium are governed by the degree of polarization and are more difficult to characterize. An important channel for insurance against power fluctuations is created under mandatory programs, because the status quo payoff is now not zero. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 5 / 32

19. The formal model Two parties H and L have to divide an exogenously given dollar each period. Time is infinite and discrete. The budget is bt ≡ (gt, xt H, xt L) B = y R3 + : 3 i=1 yi ≤ 1 . The stage utility for party i from the budget btis : ui (bt) = xt i + θi ln(gt), where θi is the weight of the public good relative to the transfer for party i. Each party maximizes its discounted dynamic payoff from an infinite sequence of budgets, ∞ t=0 δtui (bt). Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 6 / 32

20. The political system A political system with unanimity rule, the probability of being a proposer is markovian. Probability of re-election is p. At the beginning of each time period the identity of the proposer is revealed. The proposer makes an oﬀer zt. If the responding party agrees then bt = zt, otherwise bt = st. Let S ⊆ B be the set of all feasible status quo budgets. ζ : B → S is a function that maps the budget in period t to status quo in period t + 1. So st+1 = ζ(bt) for all t. The authors compare two institutions : ζ(b) = (0, 0, 0) for any b; discretionary spending. ζ(b) = (g, 0, 0) for any b = (g, xH, xL) ; mandatory spending on the public good only. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 7 / 32

24. Pareto eﬃcient allocations max{bt }∞ t=0 ∞ t=0 δt uL(bt ) s.t ∞ t=0 δt uH(bt ) ≥ ¯U, for some ¯U R and bt B for all t. The result : For any Pareto eﬃcient allocation with xt L > 0 and xt H > 0 for some t and t , it must be the case that gt = θH + θL for all t. In contrast the dictator level in any period for party i solves maxg (1 − g) + θi ln(g) and is maximized at θi < θH + θL. Hence party I’s ideal level of public good in any period results in under provision of the public good. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 8 / 32

28. Markov Perfect Equilibrium The authors consider stationary Markov perfect equilibrium. In the model the payoﬀ-relevant state in any period is the status quo s. A (pure) stationary Markov strategy for party i is a pair of functions σi = πi , αi , where πi : S → B is a proposal for party i. αi : S × B → {0, 1} is an acceptance strategy for party i. πi (s) = (γi (s), xi H(s), xi L(s)) and αi (s, z) = 1 if party i accepts the proposal, z, of party j = i in state s and 0 otherwise. Going forward I will refer to any Markov perfect equilibrium as just equilibrium. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 9 / 32

31. Equilibrium For each strategy profile σ = (σH, σL), each party has two functions : Vi (; σ) : dynamic payoff for party i if it is in power in the current period. Wi (; σ) : dynamic payoff for party i if it is the responder in the current period. The authors restrict attention to equilibrium in which (all other equilibrium are payoff equivalent): αi (s, z) = 1 when party i is indifferent between s and z αi (s, πj (s)) = 1 ∀ s S, i, j {H, L} with j = i. Equilibrium proposals are always accepted and so in such equilibrium, the proposed budget is the implemented budget. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 10 / 32

34. Equilibrium Call a strategy profile σ and associated payoff quadruple (VH, WH, VL, WL)a strategy-payoff pair. A strategy-payoff pair is an equilibrium if and only if E1-E3 hold. (E1) : Given (VH, WH, VL, WL) for any proposal z = (g , xH, xL) B and status quo s = (g, xH, xL) S, αi (s, z) = 1 iff xi + θi ln(g ) + δ[(1 − p)Vi (ζ(z)) + pWi (ζ(z))] ≥ Ki (s) (1) where Ki (s) = xi + θi ln(g) + δ[(1 − p)Vi (s) + pWi (s)] is the continuation payoff from the status quo. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 11 / 32

35. Equilibrium Call a strategy profile σ and associated payoff quadruple (VH, WH, VL, WL)a strategy-payoff pair. A strategy-payoff pair is an equilibrium if and only if E1-E3 hold. (E1) : Given (VH, WH, VL, WL) for any proposal z = (g , xH, xL) B and status quo s = (g, xH, xL) S, αi (s, z) = 1 iff xi + θi ln(g ) + δ[(1 − p)Vi (ζ(z)) + pWi (ζ(z))] ≥ Ki (s) (1) where Ki (s) = xi + θi ln(g) + δ[(1 − p)Vi (s) + pWi (s)] is the continuation payoff from the status quo. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 11 / 32

36. Equilibrium (E2) : Given (VH, WH, VL, WL) and αj , for any status quo s = (g, xH, xL) S, πi (s) satisﬁes π(s) argmaxz B xi + θi ln(g ) + δ[(1 − p)Vi (ζ(z)) + pWi (ζ(z))] (2) s.t xj + θjln(g ) + δ[(1 − p)Vj(ζ(z)) + pWj(ζ(z))] ≥ Kj(s) (3) (E3) : Given σ = ((πH, αH), (πL, αL)) the payoﬀ quadruple is given by Vi (s) = xi i (s) + θi ln(γi (s)) + δ[pVi (ζ(πi (s))) + (1 − p)Wi (ζ(πi (s)))] (4) Wi (s) = xj i (s)θi ln(γj (s)) + δ[(1 − p)Vi (ζ(πj (s))) + pWi (ζ(πj (s)))] (5) Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 12 / 32

41. Discretionary public spending Benchmark model : Recall that in this case the status quo level of public good spending as well as private transfers is zero. ζ(b) = (0, 0, 0) ∀ b B. What is Ki (s) ? Because of log utility in the public good, the responder’s acceptance constraint is not binding. So what does the proposer do ? Set g = θi every period and there is under-provision of the public good. This equilibrium is unique. (Proposition 1) The equilibrium allocation of public good follows a Markov process. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 13 / 32

45. Mandatory public spending One-period model Mandatory public spending ζ(b) = (g, 0, 0) for any b = (g, xH, xL) B. Denote status quo as g. First lets look at a one period problem. The one-period problem of the proposer (suppose party i is the proposer) is the one-shot version of problem (E2), with an exogenous status quo g. The unique equilibrium proposal strategy for party i {H, L} is (Proposition 2) : γi (g) =    θi for g ≤ θi , g for θi ≤ g ≤ θH + θL, θH + θL for θH + θL ≤ g ≤ 1. xi j (g) = 0 for g ≤ θH + θL, θj [ln(g) − ln(θH + θL)] for θH + θL ≤ g ≤ 1. and xi i (g) = 1 − γi (g) − xi j (g). Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 14 / 32

48. Mandatory public spending One-period model One-period model These strategies given the following payoﬀs to the proposer i and responder j respectively in the one-period model: Vi (g) =    1 − θi + θi ln(θi ) if g ≤ θi , 1 − g + θi ln(g) if θi ≤ g ≤ θH + θ 1 − θH − θL − θjln(g) + (θH + θL)ln(θH + θL) if θH + θL ≤ g. and Wj(g) = θjln(θi ) if g ≤ θi , θjln(g) if θi ≤ g. What is the solution to the inﬁnite-horizon problem under the exogenous status quo (g, 0, 0) each period ? Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 15 / 32

49. Mandatory public spending One-period model One-period model These strategies given the following payoﬀs to the proposer i and responder j respectively in the one-period model: Vi (g) =    1 − θi + θi ln(θi ) if g ≤ θi , 1 − g + θi ln(g) if θi ≤ g ≤ θH + θ 1 − θH − θL − θjln(g) + (θH + θL)ln(θH + θL) if θH + θL ≤ g. and Wj(g) = θjln(θi ) if g ≤ θi , θjln(g) if θi ≤ g. What is the solution to the inﬁnite-horizon problem under the exogenous status quo (g, 0, 0) each period ? Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 15 / 32

50. Mandatory public spending Inﬁnite-horizon model Inﬁnite-horizon model With an endogenous status quo g, the proposal πi (g) is a solution to the following maximization problem : π(g) argmaxz B xi + θi ln(g ) + δ[(1 − p)Vi (g ) + pWi (g )] (6) s.t xj + θjln(g ) + δ[(1 − p)Vj(g ) + pWj(g )] ≥ Kj(g) (7) where Vi and Wi satisfy (E3) and Kj(g) = θjln(g) + δ[(1 − p)Vj(g) + pWj(g)] (8) The authors construct equilibrium using the “guess and verify” method. I will discuss some of their techniques before discussing the main results. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 16 / 32

53. Mandatory public spending Infinite-horizon model Infinite-horizon model The form of the equilibrium strategies and payoffs is a natural starting point to guess the solution to the infinite-horizon case. However now since the status quo is endogenous there will be an insurance effect for the proposer due to the continuation payoffs. Hence the proposer will set the amount of the public good above its static ideal. Could be lower than or higher than the efficient value. For some parameter values the equilibrium outcomes do lead to over-provision of the public good. The authors consider two cases, based on values of θH θL . Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 17 / 32

56. Mandatory public spending Low-Polarization case Low-polarization case Define fi (g) ≡ 1 − g + θi ln(g) + δ[pVi (g) + (1 − p)Wi (g)]. The authors look for an equilibrium strategy-payoff pair with the following properties which bear some resemblance to the one period solution : (G1) : ∃ g∗ L & g∗ Hwith g∗ L < g∗ H < θH + θL such that g∗ i argmax fi (g) for i {H, L} and if g ≤ g∗ i , then πi (g) = πi (g∗), and specifically γi (g) = g∗ i . (G2) : If g [g∗ i , θH + θL], then γi (g) = g and Wj(g) = Kj(g) for i, j {H, L}with i = j. (G3) : For any i, j {H, L}with i = j, if g ≥ θH + θL, then γi (g) = θH + θL, Wj(g) = Kj(g), and the proposer’s equilibrium payoff Vi (g) takes the form Vi (g) = Ci ln(g) + Di . Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 18 / 32

60. Mandatory public spending Low-Polarization case Characterization of Equilibrium Suppose σ = (σH, σL) and associated payoff quadruple (VH, WH, VL, WL)is an equilibrium strategy-payoff pair that satisfies (G1)-(G3). First the authors establish some properties of σ and (VH, WH, VL, WL) and then use those properties to characterize the equilibrium. First consider the problem (6) without imposing the constraint (7). Denote V ∗ i = maxg fi (g), WL(g∗ H) = W ∗ L and WH(g∗ L ) = W ∗ H. Lemma 2. Under (G1), ∀ i, j {H, L}with j = i, (i) if g ≤ g∗ i ,then Vi (g) = V ∗ i ,xi i (g) = 1 − g∗ i , xi j (g) = 0, and (ii) if g ≤ g∗ j ,then Wi (g) = W ∗ i Proof : On the board! Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 19 / 32

64. Mandatory public spending Low-Polarization case Characterization of Equilibrium Now lets look at the case when the responder’s acceptance constraint is binding i.e over the range g [g∗ i , θH + θL] . Lemma 3 basically characterizes the dynamic payoﬀ of the proposer when the status quo is in a range which includes its dynamic ideal. Lemma 3. Under (G1) and (G2) , if g [g∗ L , g∗ H] , then VL(g) = 1 1 − δp [1 − g + θLln(g) + δ(1 − p)W ∗ L ] and if g [g∗ H, θH + θL] , then Vi (g) = (1 − δp)(1 − g) (1 − δ)(1 + δ − 2δp) + θi 1 − δ ln(g) for all i {H, L} . Proof : On the board! Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 20 / 32

65. Mandatory public spending Low-Polarization case Characterization of Equilibrium Now lets look at the case when the responder’s acceptance constraint is binding i.e over the range g [g∗ i , θH + θL] . Lemma 3 basically characterizes the dynamic payoﬀ of the proposer when the status quo is in a range which includes its dynamic ideal. Lemma 3. Under (G1) and (G2) , if g [g∗ L , g∗ H] , then VL(g) = 1 1 − δp [1 − g + θLln(g) + δ(1 − p)W ∗ L ] and if g [g∗ H, θH + θL] , then Vi (g) = (1 − δp)(1 − g) (1 − δ)(1 + δ − 2δp) + θi 1 − δ ln(g) for all i {H, L} . Proof : On the board! Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 20 / 32

66. Mandatory public spending Low-Polarization case Characterization of Equilibrium Lemma 4. Under (G1) and G(2) , g∗ L = θL and g∗ H = 1+δ−2δp 1−δp θH. This basically formalizes the intuition about the insurance effect that we have already discussed. The choice of g by the proposer has a static effect and a dynamic effect through the continuation payoffs. The dynamic effect creates two competing incentives for the incumbent. The insurance effect vs the bargaining effect. Under low polarization the dynamic effect of party L’s proposal is zero. Party H is concerned that if Party L comes in power it will set g to be too low and this leads it to propose g∗ H > θH. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 21 / 32

70. Mandatory public spending Low-Polarization case Characterization of Equilibrium A necessary condition for equilibrium to exist that satisﬁes (G1)-(G3) is that g∗ H < θH + θL. By Lemma 4, this is satisﬁed if θH θL < 1−δp δ(1−p) . This is the condition for “low-polarization”. Finally recall in (G3) we guessed that γi (g) = θH + θL for all g ≥ θH + θL. So we need to ensure that this holds in equilibrium as well. The responder should accept a proposal with public spending equal to θH + θL after receiving the rest of the budget as transfers. This holds in equilibrium if and only if αj (g, (θH + θL, xH, xL)) = 1 where xj = 1 − θL − θH, xi = 0 for all g ≥ θH + θL. This is equivalent to 1 − (θH + θL) ≥ θH(1 − δp) − θLδ(1 − p) (1 − δ)(1 + δ − 2δp) (−ln(θ + θL)). (∗) Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 22 / 32

75. Mandatory public spending Low-Polarization case Characterization the Equilibrium Proposition 3. Suppose θH θL < 1−δp δ(1−p) and condition (∗) holds. Then there exists an equilibrium strategy-payoff pair σ and (VH, WH, VL, WL) that satisfies (G1)-(G3). Specifically, for i, j {H, L} , j = i, γi (g) =    g∗ i for g ≤ g∗ i , g for g∗ i ≤ g ≤ θH + θL, θH + θL for θH + θL ≤ g ≤ 1. xi j (g) =    0 for g ≤ θH + θL, θj (1−δp)−θi δ(1−p) (1−δ)(1+δ−2δp) ln( g θ+θL ) for θH + θL ≤ g ≤ 1. and xi i (g) = 1 − γi (g) − xi j (g), where g∗ L = θL and g∗ H = 1+δ−2δp 1−δp θH. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 23 / 32

78. Mandatory public spending Low-Polarization case Characterization of the Equilibrium Proof : Homework! Main Idea of the proof : Make an “informed” conjecture about the equilibrium strategies and payoffs based on the lemma-ta that we saw earlier and the solution to the one-period problem. Verify that the conjecture satisfies guesses (G1)-(G3), equilibrium conditions (E1)-(E3) and the assumption on αi that all proposals made on the equilibrium path are satisfied when θH θL < 1−δp δ(1−p) . Lets look at figure 3 in the paper which is an example of numerical output from value function iterations. It shows the parties’ proposal strategies for the public good in an equilibrium that satisfies (G1)-(G3). What happens if (∗) fails ? Figure 4. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 24 / 32

82. Mandatory public spending High-Polarization case High-Polarization case Now suppose θH θL > 1−δp δ(1−p) . Recall where this condition comes from! Lets take a look at ﬁgure 5 which is again an example of numerical output when this condition holds. The strategy of party L is the same. For party H however the dynamic ideal g∗ H is now above the eﬃcient level θH + θL. Insurance motive dominates. Party H’s dynamic ideal is also chosen at very high levels of the status quo, which suggests that the acceptance constraint of party L does not bind at very high levels of the status quo. Between gH and θH + θL, party L’s acceptance constraint binds. Now the authors have to formally characterize the equilibrium. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 25 / 32

87. Mandatory public spending High-Polarization case Characterizing Equilibrium Motivated by figure 5 the authors the make the following guesses about an equilibrium strategy-payoff pair. (G1’) : ∃ g∗ L & g∗ Hwith g∗ L < θH + θL < g∗ H such that g∗ i argmax fi (g) for i {H, L}. (G2’) : If g ≤ g∗ L , then πL(g) = πL(g∗ L ) and specifically γL(g) = g∗ L ; if g [g∗ L , θH + θL], then γL(g) = g; if g ≥ θH + θL, then γL(g) = θH + θL. If g ≥ g∗ L , then WH(g) = KH(g). Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 26 / 32

90. Mandatory public spending High-Polarization case Characterizing Equilibrium (G3’) : ∃ gH & ˜gH with g∗ L ≤ gH < gH < θH + θL such that (i) πH(g) = πH(g∗ H) for g ≤ gH and g ≥ gH; (ii) if g gH , g∗ H then WL(g) = KL(g) ; (iii) if g ≤ gH or if g ≥ θH +θL, then xH L (g) = 0 and (iv) γH (g) =    g∗ H for g ≤ gH g [θH + θL, g∗ H] for gH ≤ g ≤ gH, θH + θL for gH ≤ g ≤ θH + θL, g for θH + θL ≤ g ≤ g∗ H, g∗ H for g∗ H ≤ g where g is a function satisfying θLln(g ) + δ[(1 − p)VL(g ) + pWL(g )] = KL(g). Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 27 / 32

91. Mandatory public spending High-Polarization case Characterizing Equilibrium (G3’) : ∃ gH & ˜gH with g∗ L ≤ gH < gH < θH + θL such that (i) πH(g) = πH(g∗ H) for g ≤ gH and g ≥ gH; (ii) if g gH , g∗ H then WL(g) = KL(g) ; (iii) if g ≤ gH or if g ≥ θH +θL, then xH L (g) = 0 and (iv) γH (g) =    g∗ H for g ≤ gH g [θH + θL, g∗ H] for gH ≤ g ≤ gH, θH + θL for gH ≤ g ≤ θH + θL, g for θH + θL ≤ g ≤ g∗ H, g∗ H for g∗ H ≤ g where g is a function satisfying θLln(g ) + δ[(1 − p)VL(g ) + pWL(g )] = KL(g). Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 27 / 32

92. Mandatory public spending Dynamics Equilibrium Dynamics Proposition 5 : In an equilibrium that satisﬁes (G1)-(G3) in the low polarization case, if go ≤ θ∗ H, then gs = θ∗ H; if go [θ∗ H, θH + θL] , then gs = go; if go ≥ θH + θL. In an equilibrium that satisﬁes (G1’)-(G4’) in the high polarization case, gs = θH + θL for any go. The equilibrium that was constructed, the set of steady states is [θ∗ H, θH + θL] in the low polarization case and it is the singleton {θH + θL} in the high-polarization case. The dynamics leading to the unique steady state in the high-polarization case may be non-monotonic. Proposition 6 then shows that there are no other steady states in any other equilibrium under certain conditions. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 28 / 32

95. Mandatory public spending Dynamics Comparative Statics Lets look at some comparative statics in the low polarization case. Since the highest steady state is constant at the eﬃcient level the comparative statics on the set of steady states is driven by g∗ H, party H’s dynamic ideal. Proposition 7 : g∗ H is decreasing in the persistence of power p and is increasing in the discount factor δ. Both results are very intuitive. Less persistence of power results in public good spending closer to the eﬃcient level in the steady state. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 29 / 32

96. Mandatory public spending Dynamics Comparative Statics Lets look at some comparative statics in the low polarization case. Since the highest steady state is constant at the eﬃcient level the comparative statics on the set of steady states is driven by g∗ H, party H’s dynamic ideal. Proposition 7 : g∗ H is decreasing in the persistence of power p and is increasing in the discount factor δ. Both results are very intuitive. Less persistence of power results in public good spending closer to the eﬃcient level in the steady state. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 29 / 32

97. Mandatory public spending Welfare Impacts Efficiency Implications of mandatory programs Recall there is no over provision of the public good in the low-polarization case and since g∗ H is always greater than θi (static ideal), hence the level of public good spending is always closer to the efficient level when it is mandatory than when it is discretionary. In the high polarization case there might be over-provision of the public good but as we saw before it is only a transient state. How do mandatory programs affect parties’ welfare? Mandatory programs improve the ex-ante welfare of party H which is obvious. However under certain parametric assumptions they also improve the ex-ante welfare of party L. This happens when the persistence of power is low and parties are sufficiently patient. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 30 / 32

101. Mandatory public spending Welfare Impacts Conclusions This paper provides a framework for the analysis of efficiency of mandatory programs. More specifically, the authors find that provision of the public good through mandatory programs solves the problem of under-provision of public good, compared to discretionary programs. The parties also benefit ex-ante given that they are sufficiently patient and the persistence of power is low. This ex-ante Pareto improvement might explain why many countries have enacted mandatory programs. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 31 / 32

105. Mandatory public spending Welfare Impacts Extensions Endogenise the status quo ? We kind of already know the answer to this intuitively. Endogenous level of the budget. When parties disagree the budget this period is added to the next period. So the level of the budget each period depends upon the policy choices in the previous period. The most natural extension is to allow for the value of the public good to parties to be stochastic. Mandatory programs might be bad in such a case. For example if the value of the public good is low and the status quo is high then there might be over provision of the public good. Endogenise the persistence of power, through the policy choice. Econ 681 Political Economy - Spring 2013 Mandatory vs Discretionary Spending April 24, 2013 32 / 32

Bowen, chen __eraslan

Recommended

Recommended

More Related Content

Similar to Bowen, chen __eraslan

Similar to Bowen, chen __eraslan (20)

Recently uploaded

Recently uploaded (20)

Bowen, chen __eraslan