DP5866 A Common Pool Theory of Deficit Bias Correction
|Author(s):||Signe Krogstrup, Charles Wyplosz|
|Publication Date:||October 2006|
|Keyword(s):||common pool, deficit bias, fiscal institutions, fiscal restraints, fiscal rules, stability pact|
|JEL(s):||E61, E62, H6|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5866|
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.