This course provides an introduction to the political economy of fiscal policy-making. We first analyze policy inputs, with a focus on how elections select and incentivize different types of policymakers. Second, we analyze major fiscal policy outputs: choices of taxes, public goods, tax evasion, and inequality. Methods are from economics and applied statistics.
Learning objective
Government policies on how to raise revenue and direct expenditures are critical for economic performance and for the fair distribution of income across society. Yet these policies must be designed and implemented by individuals whose interests may diverge from the people they represent. This course provides an introduction to the political and economic factors determining fiscal policies, and the resulting impacts on economic performance and income distribution.
We compare three systems for choosing policies: direct democracy (decision by voters), representative democracy (decision by politicians), and tenured bureaucracy (decision by judges). More democratic systems are likely to align policies with the preferences of the median voter, while more bureaucratic systems tend to engage technical expertise and protect minority rights. We use applied game theory models to clarify the differences across these systems.
We then ask how different institutions might lead to different fiscal policies. The major policy outputs considered are those from public finance: taxation, public goods, and redistribution. For each of these policy choices, we ask what insights are generated by economic theory and then consider how different governance systems might approach or diverge from these insights. Some reasons for divergence include lobbying and corruption, tax loopholes and evasion, and the tradeoff between efficiency and inequality.
The analytical framework is economic theory, which represents voter and policymaker decisions as optimization problems. We will see that the predictions generated by the economic models are sensitive to the assumptions made, and therefore empirical evidence is needed to choose between models. To this end, students will implement the standard methods in applied statistics and policy evaluation, including fixed effects regressions, instrumentral variables, regression discontinuity designs, and randomized control trials.
Performance assessment
Performance assessment information (valid until the course unit is held again)
Performance assessment as a semester course