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Title: A Common Pool Theory of Deficit Bias Correction

Author(s): Signe Krogstrup and Charles Wyplosz

Publication Date: October 2006

Keyword(s): common pool, deficit bias, fiscal institutions, fiscal restraints, fiscal rules and stability pact

Programme Area(s): International Macroeconomics

Abstract: The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible.

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Bibliographic Reference

Krogstrup, S and Wyplosz, C. 2006. 'A Common Pool Theory of Deficit Bias Correction'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5866