Essays on governance, fiscal policy, and growth
Abstract
This thesis comprises three separate essays on the determination of fiscal policy, and its impacts on an economy where economic agents are heterogeneous in their endowments or preferences. The first two essays are closely related, and examine the impact of corruption (in the form of graft and embezzlement of public funds) on the determination of fiscal policy and growth. The third essay is independent. It examines the determination of policy in the institutional environment of a presidential democracy. The first essay establishes the link between the fiscal integrity of public institutions and the manner in which fiscal policy is chosen. In an endogenous growth framework with distributive conflict, politicians and bureaucrats trade off constituent welfare (treated as electoral or political constraints) and the gains from personal rent seeking (graft). The optimal choice taxation, the level of government spending, and the composition of the budget reflects this trade off. The model hypothesizes that increased rent seeking at the political level tends to skew fiscal policy away from redistributive activities, and more towards infrastructural activities. The model also shows that when corruption is a prevalent problem at the political level, reductions in bureaucratic corruption in areas of productive public expenditure are not necessarily welfare enhancing. The second essay extends the analysis of the first, to explicitly treat the possibility of auditing public officials, as a method of reducing graft. The sensitivity of the optimal level of graft (chosen by rent maximizing bureaucrats) to the auditing technology, punishment, and the stability of their jobs is analyzed. It is shown that only some auditing technologies reduce graft automatically, while others succeed only if there is a credibly enforceable punishment structure. The third essay examines the determination of any policy (that can be represented as a scalar, such as taxation, redistribution, privatization, or pollution control) in a presidential democracy, over which voters and their representatives in the legislature have heterogeneous or partisan preferences. The equilibrium policy is the outcome of a game between a President, a Speaker, and the legislature. The essay first develops a partial equilibrium analysis by treating the preferences of the President and the Speaker as given. It then proposes some mechanisms by which they can be made endogenous, taking into account the possibility of strategic voting, and the possibility of failure of the legislative process.
Recommended Citation
Srikant Seshadri,
"Essays on governance, fiscal policy, and growth"
(January 1, 1999).
Boston College Dissertations and Theses.
Paper AAI9923409.
http://escholarship.bc.edu/dissertations/AAI9923409
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