Fiscal Rules, Fiscal Institutions, and Fiscal Performance

Provided by Research Papers in Economics

The Economic and Social Review, Vol. 33, No. 3, Winter, 2002, pp. 263-284

Fiscal Rules, Fiscal Institutions,
and Fiscal Performance

JÜRGEN VON HAGEN^*

Centre for European Integration Studies, Bonn

I INTRODUCTION

Public spending is a story of some people spending other people’s money. In
modern democracies, voters elect politicians to make decisions about
public spending for them, and they provide the funds by paying taxes. Two
aspects of this story are worrying and have received considerable academic
interest in recent years. The first is that public spending involves delegation,
and, hence, principal-agent relationships. Elected politicians can extract rents
from being in office, i.e., use some of the funds entrusted to them to pursue
their own interests, be it outright in corruption, for perks, or simply waste.
Voters might wish to eliminate the opportunity to extract rents by subjecting
politicians to rules stipulating what they can and must do under given
conditions. But the need to react to unforeseen developments and the
complexity of the situation makes the writing of such contracts impossible. For
the same reasons, politicians cannot realistically commit fully to promises
made during election campaigns. Hence, like principal-agent relations in
many other settings, the voter-politician relationship resembles an
“incomplete contract” (Seabright, 1996; Persson et al., 1997a, b; Tabellini,
2000).

* This paper was delivered as the inaugural F. Y. Edgeworth Lecture at the Sixteenth Annual
Conference of the Irish Economic Association.

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