Search

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.euroecorev.2005.06.002 Byline: Hideki Konishi Abstract: 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. Author Affiliation: Department of Social Engineering, Tokyo Institute of Technology, W9-81, 2-12-1,O-okayama, Meguro-ku Tokyo 152-8552, Japan Article History: Received 22 January 2003; Accepted 21 June 2005

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. JEL classification: D72; E62; H30 Keywords: Composition of fiscal adjustments; Retrospective voting; Common agency; Deficit limits

A study analyzing the relative cost-effectiveness of intergovernmental versus intersource cross-border emissions trading when polluting firms is noncompliant with special emphasis on enforcement costs and the associated credibility problem of governmental monitoring is presented. The results are discussed.

The relative efficiency of tariffs versus quotas is analysed in a Cournot oligopoly with strategic investment, introducing quota licence fees to neutralize the international distributional effect. When such licence fees remove quota rents from foreign firms, then for the case of constrained entry with a sufficiently large number of firms, quotas frequently hold a welfare advantage, since tariffs relatively aggravate the inefficiency from overinvestment. In the case of free entry and exit, however, tariffs hold a welfare advantage, since there is greater benefit of increasing returns to scale to the economy by avoidance of excessive entry of firms.