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.