Article

Social Choice and Welfare

, Volume 36, Issue 3, pp 565-589

Bargaining over the budget

  • Daniel DiermeierAffiliated withDepartment of Managerial Economics and Decision Sciences (MEDS), Kellogg School of Management, Northwestern UniversityFord Motor Company Center for Global Citizenship, Kellogg School of Management, Northwestern University
  • , Pohan FongAffiliated withDepartment of Economics and Finance, City University of Hong Kong Email author 

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Abstract

This article presents a theory of government expenditure and identifies how an inefficient government budget is shaped by its initial size and allocation. Assuming that the parties in the legislative body agree with the optimal size of a government budget but have conflict of interests over its allocation, we show that, if the initial budget size is sufficiently large and the initial allocation is sufficiently unequal, in equilibrium the budget size is greater than what it would be had the initial budget size been sufficiently small.