Journal Article

Transparency and Economic Policy

Alessandro Gavazza and Alessandro Lizzeri

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 3, pages 1023-1048
Published in print July 2009 | ISSN: 0034-6527
Published online July 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00547.x
Transparency and Economic Policy

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  • Taxation, Subsidies, and Revenue
  • Public Economics
  • Analysis of Collective Decision-making

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We provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters. Imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary. Government spending is larger than in a world of perfect observability. Transfers are partly financed through government debt, and the size of the debt is higher in less transparent political systems. The model provides an explanation of fiscal churning; it also predicts that groups whose transfers are less visible to others receive higher transfers, and that imperfect transparency of transfers may lead to underprovision of public goods. From the policy perspective, the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues. We show that the transparency of the political system does not unambiguously improve efficiency: transparency of spending is beneficial, but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending.

Keywords: D72; H11; H23

Journal Article.  12116 words.  Illustrated.

Subjects: Taxation, Subsidies, and Revenue ; Public Economics ; Analysis of Collective Decision-making

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