A model of the optimal allocation of government expenditures

[en] Government expenditures can be used for various socioeconomic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay-as-you-go intergenerational contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the steady state. © 2019 Wiley Periodicals, Inc.

Disciplines :

Macroeconomics & monetary economics

Author, co-author :

Fan, Simon; Department of Economics, Lingnan University, Tuen Mun, Hong Kong

Pang, Yu; School of Business, Macau University of Science and Technology, Taipa, Macau

Pestieau, Pierre ; Université de Liège - ULiège > HEC Liège > HEC Liège

Language :

English

Title :

A model of the optimal allocation of government expenditures

Publication date :

2020

Journal title :

Journal of Public Economic Theory

ISSN :

1097-3923

eISSN :

1467-9779

Publisher :

Blackwell, Oxford, United Kingdom

Volume :

Issue :

Pages :

845-876

Peer reviewed :

Peer Reviewed verified by ORBi

Available on ORBi :

since 08 February 2021

Statistics

Number of views

157 (13 by ULiège)

Number of downloads

5 (5 by ULiège)

More statistics

Scopus citations^®

Scopus citations^®
without self-citations

OpenCitations

OpenAlex citations

Bibliography

Allingham, M., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3-4), 323–338.
Almond, D., Currie, J., & Duque, V. (2018). Childhood circumstances and adult outcomes: Act II. Journal of Economic Literature, 56(4), 1360–1446. https://doi.org/10.1257/jel.20171164
Auerbach, A. J., & Hines, J. R. (2002). Taxation and economic efficiency. Handbook of Public Economics, 3, 1347–1421.
Auerbach, A. J., Gokhale, J., & Kotlikoff, L. (1994). Generational accounting: A meaningful way to evaluate fiscal policy. Journal of Economic Perspectives, 8(1), 73–94.
Barr, N. (1992). Economic theory and the welfare state: A survey and interpretation. Journal of Economic Literature, 30(2), 741–803.
Becker, G. (1991). A treatise of the family. Cambridge, MA: Harvard University Press.
Becker, G., & Lewis, H. G. (1973). On the interaction between the quantity and quality of children. Journal of Political Economy, 81(2), S279–S288.
Becker, G., Murphy, K. M., & Tamura, R. (1990). Human capital, fertility, and economic growth. Journal of Political Economy, 98(5), 12–37.
Behrman, J. R., Foster, A. D., Rosenzweig, M. R., & Vashishtha, P. (1999). Women's schooling, home teaching, and economic growth. Journal of Political Economy, 107(4), 682–714.
Benabou, R. (1996). Heterogeneity, stratification, and growth: Macroeconomic implications of community structure and school finance. American Economic Review, 86(3), 584–609.
Boadway, R., & Keen, M. (2000). Redistribution. In A. B. Atkinson & F. Bourguignon (Eds.), Handbook of income distribution (Vol. 1, pp. 677–789). New York, NY: Elsevier.
Boadway, R., & Marchand, M. (1995). The use of public expenditures for redistributive purposes. Oxford Economic Papers, 47(1), 45–59.
Brito, D., Hamilton, J., Slutsky, S., & Stiglitz, J. (1991). Dynamic optimal income taxation with government commitment. Journal of Public Economics, 44(1), 15–35.
Broecke, S. (2016). Do skills matter for wage inequality? IZA World of Labor, https://doi.org/10.15185/izawol.232
Cremer, H., Donder, P., & Pestieau, P. (2010). Education and social mobility. International Tax and Public Finance, 17, 357–377.
Cremer, H., Gahvari, F., & Pestieau, P. (2011). Fertility, human capital accumulation, and the pension system. Journal of Public Economics, 95(11–12), 1272–1279.
Cremer, H., Gahvari, F., & Pestieau, P. (2017). Uncertain altruism and the provision of long term care. Journal of Public Economics, 151(C), 12–24.
Cremer, H., Pestieau, P., & Rochet, J.-C. (2001). Direct versus indirect taxation: The design of the tax structure revisited. International Economic Review, 42, 781–799.
De la Croix, D., & Doepke, M. (2003). Inequality and growth: Why differential fertility matters. American Economic Review, 93(4), 1091–1113.
De la Croix, D., & Doepke, M. (2004). Public versus private education when differential fertility matters. Journal of Development Economics, 73(2), 607–629.
De la Croix, D., & Michel, P. (2002). A theory of economic growth: Dynamics and policy in overlapping generations. New York, NY: Cambridge University Press.
Del Rey, E., & Lopez-Garcia, M.-A. (2013). Optimal education and pensions in an endogenous growth model. Journal of Economic Theory, 148(4), 1737–1750.
Del Rey, E., & Lopez-Garcia, M.-A. (2016). Endogenous growth, education subsidies, and intergenerational transfers. Economic Modelling, 52(B), 531–539.
Docquier, F., Paddison, O., & Pestieau, P. (2007). Optimal accumulation in an endogenous growth setting with human capital. Journal of Economic Theory, 134(1), 361–378.
Ehrlich, I., & Lui, F. T. (1991). Intergenerational trade, longevity, and economic growth. Journal of Political Economy, 99(5), 1029–1059.
Fan, C. S., & Stark, O. (2008). Looking at the ‘population problem’ through the prism of heterogeneity: Welfare and policy analyses. International Economic Review, 49(3), 799–835.
Fan, C. S., & Zhang, J. (2013). Differential fertility and intergenerational mobility under private versus public education. Journal of Population Economics, 26(3), 907–941.
Fleurbaey, M. (2008). Fairness, responsibility, and welfare. Oxford: Oxford University Press.
Fleurbaey, M. (2009). Beyond GDP: The quest for a measure of social welfare. Journal of Economic Literature, 47(4), 1029–1075.
Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. Review of Economic Studies, 60(1), 35–52.
Galor, O., & Weil, D. N. (2000). Population, technology, and growth: From malthusian stagnation to the demographic transition and beyond. American Economic Review, 90(4), 806–828.
Ganelli, G., & Tervala, J. (2009). Can government spending increase private consumption? The role of complementarity. Economics Letters, 103(1), 5–7.
Geller, A. M., & Zenick, H. (2005). Aging and the environment: A research framework. Environmental Health Perspectives, 113(9), 1257–1262.
Glomm, G., & Ravikumar, B. (1992). Public versus private investment in human capital: Endogenous growth and income inequality. Journal of Political Economy, 100(4), 818–834.
Glomm, G., & Ravikumar, B. (1997). Productive government expenditures and long-run growth. Journal of Economic Dynamics and Control, 21(1), 183–204.
Hamilton, J., & Slutsky, S. (2007). Optimal nonlinear income taxation with a finite population. Journal of Economic Theory, 132(1), 548–556.
Hanushek, E. A. (1996). Measuring investment in education. Journal of Economic Perspectives, 10(4), 9–30.
Harsanyi, J. C. (1955). Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility. Journal of Political Economy, 63(4), 309–321.
Heckman, J., Pinto, R., & Savelyev, P. (2013). Understanding the mechanisms through which an influential early childhood program boosted adult outcomes. American Economic Review, 103(6), 2052–2086.
Kaganovich, M., & Zilcha, I. (1999). Education, social security, and growth. Journal of Public Economics, 71(2), 289–309.
Karlsson, C., & Gråsjö, U. (2014). Knowledge flows, knowledge externalities, and regional economic development. In M. M. Fischer & P. Nijkamp (Eds.), Handbook of regional science (pp. 413–437). Berlin/Heidelberg: Springer.
Lee, R. D., & Mason, A. (2011). Population aging and the generational economy: A global perspective. Cheltenham: Edward Elgar Publishing.
Lucas, R. E., Jr. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
Mason, A., & Tapinos, G. (2000). Sharing the wealth: Demographic change and economic transfers between generations. Oxford: Oxford University Press.
Meltzer, A. H., & Richard, S. F. (1981). A rational theory of the size of government. Journal of Political Economy, 89(5), 914–927.
Mirrlees, J. A. (1971). An exploration in the theory of optimum income taxation. Review of Economic Studies, 38(2), 175–208.
Mookherjee, D., & Napel, S. (2007). Intergenerational mobility and macroeconomic history dependence. Journal of Economic Theory, 137(1), 49–78.
Musgrave, R. A. (1959). The theory of public finance. New York, NY: McGraw Hill.
OECD. 2018. General government spending (Indicator). Retrieved from https://doi.org/10.1787/a31cbf4d-en
Pestieau, P., & Lefebvre, M. (2018). The welfare state in Europe: Economic and social perspectives (2nd ed.). Oxford: Oxford University Press.
Phaneuf, D., & Requate, T. (2017). A course in environmental economics: Theory, policy, and practice. New York, US: Cambridge University Press.
Piketty, T., & Saez, E. (2013). Optimal labor income taxation. Handbook of Public Economics, 5, 391–474.
Possen, U., & Slutsky, S. (1980). Public-private consumption tradeoffs and the balanced budget multiplier. Quarterly Journal of Economics, 95(4), 679–702.
Ramey, G., & Ramey, V. A. (2010). The rug rat race. Brookings Papers on Economic Activity, 41(1), 129–176.
Rangel, A. (2003). Forward and backward intergenerational goods: Why is social security good for the environment? American Economic Review, 93(3), 813–834.
Rosenthal, S., & Strange, W. (2008). The attenuation of human capital spillovers. Journal of Urban Economics, 64(2), 373–389.
Samuelson, P. A. (1954). The pure theory of public expenditure. Review of Economics and Statistics, 36(4), 387–389.
Slemrod, J. (2007). Cheating ourselves: The economics of tax evasion. Journal of Economic Perspectives, 21(1), 25–48.
Stiglitz, J. E. (2015). Leaders and followers: Perspectives on the Nordic model and the economics of innovation. Journal of Public Economics, 127, 3–16.
Varvarigos, D., & Zakaria, I. (2013). Endogenous fertility in a growth model with public and private health expenditures. Journal of Population Economics, 26(1), 67–85.
Vernon, P. E. (1979). Intelligence: Heredity and environment. San Francisco, CA: W. H. Freeman and Company.
Willis, R. (1973). A new approach to the economic theory of fertility behavior. Journal of Political Economy, 81(2), S14–S64.
World Bank. (2017). World development indicators 2017. Washington, DC: Author.