In all industrial countries, fiscal policy is increasingly about redistribution. In this paper, we study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation. We show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries, depending on the degree of centralization of the wage-setting process in the labor market. We find considerable empirical support for the model in a sample of 14 OECD countries.

This paper presents a model where income distribution and redistributive fiscal policy interact to affect the budget deficit and the pattern of net borrowing of a country. According to the standard representative agent paradigm, a small open economy should smooth consumption by borrowing from (lending to) the rest of the world when its income increases (declines) over time. The simple model of this paper delivers exactly the same predictions in the absence of income dispersion. When income distribution is not degenerate, however, the same model gives rise to a surprising wealth of results. In particular, poor economies with high inequality may exhibit completely counter-intuitive patterns of fiscal policy and external borrowing. The country's production path declines over time, because the more mobile agents leave the country to escape taxation; yet, the country might end up having a budget deficit and borrowing from abroad, thereby reinforcing rather than smoothing the asymmetry in consumption between the two periods. An important feature of this outcome is that it is backed by both the poor and the rich, who gain from the fiscal system at the expense of the middle class.

This paper develops a two-country model to study two questions. How do the degrees of centralization of redistribution and of factor mobility affect the productive efficiency of the economies? What degrees of centralization of redistribution and of factor mobility are likely to be chosen by majority rule? The model shows that a system of centralized redistribution can lead to less efficient outcomes if labor or capital are not mobile; and an inefficient outcome, with incomplete or no factor mobility, receives a majority of votes in both countries, whenever the structure of labor markets is very different in the two countries. (JEL D72, E62, H50, H77)

The critical economic policy issue for many OECD countries, developing countries, and transition economies currently is fiscal consolidation, and the maintenance of long-run fiscal balance. Two related components underlie this general goal. First, several countries face the issue of deficit reduction, particularly those countries with high debt/GDP ratios. Second, it is becoming increasingly apparent that major reforms of the welfare system and, specifically, of social-security systems are critical ingredients of a long-lasting fiscal consolidation (see Alesina and Perotti, 1995a). In the case of monetary policy, a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions. Relatively few economists dispute the benefits of a certain amount of central-bank independence, even though different commentators and policymakers may disagree on the optimal degree of independence. Also a contracting approach has highlighted the benefit of inflation-targeting and of certain institutional relationships ( contracts) between the executive and the central bank. A similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning. In this paper we ask the following two questions: (i) Do budget procedures matter for the determination of the budget balance and its composition? (ii) Are there certain institutional reforms that one should feel comfortable in recommending? Based on the relatively scarce empirical evidence available, we tentatively answer yes to the first question: budget procedures matter. On the second question we suggest that the two critical areas of reform are: first, more transparency; second, a strengthening of the roles of the executive branch vis 'a vis the legislature, and of the treasury minister vis a vis the rest of the executive branch, in order to achieve a centralized and top-bottom approach to the budget process.

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. We find a sizeable negative effect of public spending—and in particular of its wage component— on profits and on business investment. This result is consistent with different theoretical models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than those of taxes. Our results can explain the so-called “non-Keynesian” (i.e., expansionary) effects of fiscal adjustments.