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American Economic Review Vol. 104 No. 10 2014

Mandatory versus Discretionary Spending: The Status Quo Effect

T. Renee Bowen1; Ying Chen2; Hülya Eraslan3

1 Stanford University, 655 Knight Way, Stanford, CA 94305, and the Hoover Institution (e-mail: ) · 2 Department of Economics, Johns Hopkins University, 3400 N. Charles Street, Baltimore, MD 21218 (e-mail: ) · 3 Department of Economics, MS-22, Rice University, PO Box 1892, Houston, TX 77251-1892 (e-mail: ).

Abstract

Do mandatory spending programs such as Medicare improve efficiency? We analyze a model with two parties allocating a fixed budget to a public good and private transfers each period over an infinite horizon. We compare two institutions that differ in whether public good spending is discretionary or mandatory. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed. Mandatory programs result in higher public good spending; furthermore, they ex ante Pareto dominate discretionary programs when parties are patient, persistence of power is low, and polarization is low.

DOI
10.1257/aer.104.10.2941
Volume
104
Issue
10
Pages
2941-2974
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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