Scandinavian Working Papers in Economics
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Health Economics Research Programme, University of Oslo HERO On line Working Paper Series

No 2001:2:
Politicians and soft budget constraints

Dag Morten Dalen (), Espen R. Moen and Christian Riis

Abstract: We study soft budget constraints from the perspective of political economics. A partly partisan government confronts a budget crisis in a politically important sector, e.g. like the health care sector. To what extent the government wants to make additional grants to the sector depends on economic conditions and on the preferences of the government, both unknown to the electorate. Thus, the government’s budget response gives a signal of its preferences, and may thereby influence the probability that the government is re-elected. As a result, the handeling of a budget crisis becomes inefficient even from an ex post point of view, in the sense that it does not react adequately to changing economic conditions.

Keywords: Political economics; budget constraints; budget crisis; (follow links to similar papers)

JEL-Codes: I18; (follow links to similar papers)

17 pages, June 30, 2009

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