Time-consistent policy and politics: does voting matter when individuals are identical?

We consider the implications of a lack of policy commitment when policies are chosen through a political process and individuals are ex-ante identical. We show that politics, by allowing ex-post distributional tensions to shape policy, can make it possible to sustain non-trivial equilibria in which the commitment problem is alleviated or fully eliminated. How effective politics can be at countering collective commitment problems in homogeneous groups depends on the nature of the political process and on the extent to which private choices are public information

Time-Inconsistent Candidates vs. Time-Inconsistent Voters : Imperfect Policy Commitment in Political Equilibrium

This paper examines whether policy commitment mechanisms, when available, will be used by the elected policymaker in a political-economy equilibrium. We describe a two period repeated voting model where second-period outcomes depend on commitment choices made by an elected policymaker in the first period, and where elected candidates may choose to deviate from their preferred level of commitment, retaining discretionary control of policy variables, in order to secure a favourable second-period political outcome. The implications of different political tenure systems for the candidates who are elected, the policy targets that are selected, the degree of commitment to their implementation, and the policies that are actually implemented in the model are examined.Dynamically Consistent Choices ; Policy Commitment ; Voting

Viable Tax Constitutions

Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. However, in the absence of an outside party enforcing contracts between members of a group, no arrangement within groups can be considered to be a binding contract, and therefore the power of tax must be sanctioned by individuals on an ongoing basis. In this paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interptretation of the theoretical constructions of the public finance tradition while in others call them into questionTaxation ; Public Goods ; Government

The New Regionalism: Trade Liberalization or Insurance?

Several of the recently negotiated regional trade agreements (Canada-U.S., NAFTA, E.C.-Hungary/Poland/Czeck and Slovak Republics) contain significantly fewer concessions by the large countries to smaller countries than vice versa. Yet, it is small countries that have sought them and see themselves as the main beneficiaries. In this paper we attempt to resolve this seeming paradox by interpreting such agreements as insurance arrangements for smaller countries, which partially protect them against the consequences of a global trade war. What they offer to the large countries in return is largely non-trade benefits (such as restraints on domestic policies in the smaller countries, firmer intellectual property protection, firmer guarantees of royalty arrangements affecting resources on state-owned lands). When evaluated alongside the regional trade arrangements of the 1960s (such as the E.C.), these agreements may appear to produce little or no benefit relative to the status quo for smaller countries; but when evaluated relative to a post-retaliation tariff equilibrium, the value of these agreements to small countries is large because they help preserve existing access to larger foreign markets. There is little incentive for large countries to negotiate such arrangements without side payments of the non-trade variety, because these agreements constrain their ability to play strategically against smaller neighbouring countries (who are still important trade partners) in a trade war. Such regional agreements compared across constrained and unconstrained Nash outcomes will typically be welfare worsening for large countries, and side payments are needed for the

Investment Subsidies and Time-Consistent Environmental Policy

We describe a model of dynamic pollution abatement choices with heterogeneous agents, where, due to the presence of a distributional objective and to the absence of incentive-compatible compensation mechanisms, the choice of a second-best level of emission taxation is time-inconsistent. In this model, we investigate whether investment subsidies can act as a substitute for policy commitment.Pollution Abatement ; Emission Taxes ; Investment Subsidies

Tax earmarking and grass-roots accountability

We ask whether tax earmarking can foster accountability in public provision of goods and services when consumers can privately monitor provision. We show that earmarking can raise the stakes that consumers have in monitoring public provision independently of how taxes are earmarked, because it introduces a more direct linkage between monitoring and taxes paid

Self-Enforcing International Agreements and Domestic Policy Credibility

We explore the relationship between international policy coordination and domestic policy credibility when both must be self-supporting. Our arguments are presented in the context of a two-country, two-period model of dynamic emission abatement with transboundary pollution, where government policies suffer from a time-consistency problem. In the absence of repeated interaction, any form of coordination - between governments, and between governments and their respective private sectors - improves policy making. Nevertheless, under repeated interaction international policy spillovers can make it possible to overcome the domestic credibility problem; and, conversely, the inability to precommit to policy domestically can help support international policy cooperation.policy commitment, self-enforcing international agreements

Issue Linkage and Issue Tie-in in Multilateral Negotiations

We describe a model of international, multidimensional policy coordination where countries can enter into selective and separate agreements with different partners along different policy dimensions. The model is used to examine the implications of negotiation tie-in - the requirement that agreements must span multiple dimensions of interaction - for the viability of multilateral cooperation when countries are linked by international trade flows and transboundary pollution. We show that, while in some cases negotiation tie-in has either no effect or can make multilateral cooperation more viable, in others a formal tie-in constraint can make an otherwise viable joint multilateral agreement unstable.international cooperation, trade and environmental policy negotiations