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Published on Feb 15, 2016

Abstract

Budgetary institutions are defined as the set of all the rules and regulations according to which budgets are prepared, approved and carried out (Alesina and Perotti (1999)). These institutions have generally been divided into three di®erent categories.

The first are rules that impose numerical constraints on the deficit. The second are procedural rules that dictate the timing and mechanisms by which the budget is drafted within the executive and approved by the legislature. The third and final category, is the degree of transparency of the budgetary process. Each one of the next three chapters is a self-contained essay that explores different aspects of budgetary institutions. They have in common, though, one of these institutions: the transparency of the budgetary process.

When compared with other models that look at similar issues, the novel characteristics of the model presented here are twofold:

First, from a technical point of view, the model's dynamic structure arises from first principles. This structure allows the study of policy decisions over long periods of time.

Second, from a conceptual point of view, the model shows that lack of transparency is a su±cient condition for generating undesirable levels of debt and deficits. The main lesson of the chapter is that, in a democratic environment, transparency of the budgetary process is the main ingredient responsible for the good
behavior of the government, and that numeric constraints will have very different effects depending on the level of transparency.

What is the role of budgetary institutions in shaping the size of the budget and, ultimately, the delivery of public goods? How independent are these institutions from one each other and which ones, if any, are truly necessary and/or suffcient to affect fiscal outcomes? This paper explains how two different countries that are supposed to obey the same set of rules, like the members of the European Union and the Maastrich Treaty, can have such dissimilar fiscal outcomes. In other words, it will provide an explanation of how and when these rules will be an active constraint on the government.

Model

Shi and Svenson (2001) propose a moral hazard model of electoral competition to explain a set of empirical findings about the size of electoral budget cycles, and conclude that these depend on the rents of those remaining in power and the share of informed voters. Alt and Lassen (2003) slightly modify the Shi and Svenson model and reinterpret the share of informed voters as transparency in the budgeting process, and conclude that lower transparency produces higher levels of debt and larger deficits.

The problem with their model is that in the absence of electoral cycles (i.e., if there were no elections or if elections occurred in every period), no debt or deficit could be generated. In other words, the Alt and Lassen model predicts that transparency affects fiscal outcomes only in the electoral year. In contrast, the model presented here builds on some of the structure of the Shi and Svenson model, but eliminates the political fiscal cycle motive by allowing elections to occur in every period. In spite of this removal, the current model still generates an inverse relationship between transparency and debt.

This is relevant not only from a conceptual perspective, but also because the majority of empirical tests al (1998), Alt and Lassen (2003) themselves) analyze the cross-sectional implications of transparency in fiscal outcomes and none of them show evidence that an election dummy is signi¯cant. Shi and Svenson do test their dynamic model with a good proxy for the share of informed voters (number of radios per head) but that could hardly be considered a good proxy for budgetary transparency.

Author: Nicolas Amoroso Doctor of Philosophy, 2006

Source: http://drum.lib.umd.edu/bitstream/1903/4171/1/umi-umd-3970.pdf