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.