TY - JOUR
T1 - Spending cuts or tax increases? The composition of fiscal adjustments as a signal
AU - Konishi, Hideki
N1 - Funding Information:
The author would like to thank anonymous referees, Robert Dur, Wolfgang Gick, Verena Liessem, and seminar participants in the University of Tokyo, Hitotsubashi University, and Nanzan University for helpful comments and suggestions. Financial support from the Inamori Foundation and Japan Society for the Promotion of Science (Grant-in-Aid for Scientific Research # 17530237) is also gratefully acknowledged.
PY - 2006/8
Y1 - 2006/8
N2 - This paper shows that the composition of fiscal adjustments, spending cuts versus tax increases, serves as a signal of the government's degree of collusion with special interests. The politico-economic model of fiscal policies, combining retrospective voting with common-agency-type lobbying, presents undominated separating equilibria and intuitive pooling ones, in both of which fiscal adjustments with sufficiently large spending cuts lead to incumbent reappointment whereas those with only tax increases lead to incumbent defeat. These findings are consistent with the recent empirical evidence of voters behaving as fiscal conservatives. The efficiency-enhancing aspects of the signaling mechanism and the effects of imposing a deficit limit are also analyzed.
AB - This paper shows that the composition of fiscal adjustments, spending cuts versus tax increases, serves as a signal of the government's degree of collusion with special interests. The politico-economic model of fiscal policies, combining retrospective voting with common-agency-type lobbying, presents undominated separating equilibria and intuitive pooling ones, in both of which fiscal adjustments with sufficiently large spending cuts lead to incumbent reappointment whereas those with only tax increases lead to incumbent defeat. These findings are consistent with the recent empirical evidence of voters behaving as fiscal conservatives. The efficiency-enhancing aspects of the signaling mechanism and the effects of imposing a deficit limit are also analyzed.
KW - Common agency
KW - Composition of fiscal adjustments
KW - Deficit limits
KW - Retrospective voting
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U2 - 10.1016/j.euroecorev.2005.06.002
DO - 10.1016/j.euroecorev.2005.06.002
M3 - Article
AN - SCOPUS:33746993704
SN - 0014-2921
VL - 50
SP - 1441
EP - 1469
JO - European Economic Review
JF - European Economic Review
IS - 6
ER -