Fiscal Constitutions |
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Authors: | Costas AzariadisVincenzo Galasso |
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Affiliation: | a University of California, Los Angeles, Los Angeles, California, f1azariadi@ucla.eduf1b IGIER, Universidad Carlos III de Madrid, Madrid, Spainf2vincenzo.galasso@uni-bocconi.itf2c CEPR, f3vincenzo.galasso@uni-bocconi.itf3 |
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Abstract: | We study the impact of fiscal constitutions on intergenerational transfers in an overlapping generation model with linear technology. Transfers represent outcomes of a voting game among selfish agents. Policies are decided one period at a time. Majoritarian systems, which accord voters maximum fiscal discretion, sustain all individually rational allocations, including dynamically inefficient ones. Constitutional rules, which give minorities veto power over fiscal policy changes proposed by the majority, are equivalent to precommitment. These rules eliminate fluctuating and dynamically inefficient transfers and sustain weakly increasing transfer sequences that converge to the golden rule. The golden rule allocation is the unique outcome of Markov constitutional rules. Journal of Economic Literature Classification Numbers: D72, H55. |
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Keywords: | veto power constitutional rules indeterminacy |
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