Partisan Public Investment and Debt: The Case for Fiscal Restrictions

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dc.contributor.author BETTSMA, Roel M.W.J.
dc.contributor.author VAN DER PLOEG, Frederick
dc.date.accessioned 2007-10-27T08:08:52Z
dc.date.available 2007-10-27T08:08:52Z
dc.date.issued 2007
dc.identifier.issn 1725-6704
dc.identifier.uri http://hdl.handle.net/1814/7338
dc.description.abstract The political distortions in public investment projects are investigated within a bipartisan framework. The role of scrapping and modifying projects of previous governments receives special attention. The ruling party overspends on large ideological public investment projects and accumulates too much debt to bind the hands of its successor, especially if the probability of being removed from office is large and the possibility of scrapping is not ruled out. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the socially optimal level of public debt. Social welfare is boosted more by investment restrictions on ideological projects. The government then perceives a larger benefit of debt reduction. In fact, if scrapping is forbidden, optimal investment restrictions can yields the socially optimal outcome. Finally, debt and investment restrictions are not needed if investment projects only have a financial return. en
dc.language.iso en en
dc.publisher European University Institute
dc.relation.ispartofseries EUI ECO en
dc.relation.ispartofseries 2007/37 en
dc.subject political economy en
dc.subject bipartisan en
dc.subject public investment en
dc.subject ideological projects en
dc.subject market projects en
dc.subject scrapping public investment en
dc.subject golden rule en
dc.subject investment restriction en
dc.subject deficit rule en
dc.subject E6 en
dc.subject H6 en
dc.subject H7 en
dc.title Partisan Public Investment and Debt: The Case for Fiscal Restrictions en
dc.type Working Paper en
dc.neeo.contributor BETTSMA|Roel M.W.J.|aut|
dc.neeo.contributor VAN DER PLOEG|Frederick|aut|
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