Governance and Efficiency of Fiscal Institutions

The rationale for fiscal rules and institutions has been explained by the existence of deficit and spending biases that arise due to political fragmentation within government or between governments that alternate in office. In common pool models fiscal outcomes are determined by the decision-making rule that is used to aggregate conflicting interests into a single budget and they can affect spending bias. Several institutional responses are possible for internalizing the overall costs of budgetary programs. These costs could be internalized by giving a strong mandate to the minister of finance, whose role is to consider the overall effects of policies. This paper analyses a model in which the minister of finance internalizes the common pool budget’s externality. First, we consider a model where all ministers play simultaneously, and MF acts as a spending minister. In order to capture the institutional framework, where MF takes in account the budget equilibrium, we have modeled the interaction in a sequential way. Under this assumption the minister of finance maximizes his utility function as a leader. In a sequential equilibrium, leader’s expenditure choice is grater than in simultaneous result, while the deficit bias is lower due to agenda setting power over spending ministers.