This dissertation contributes to the literature on the relationship between politicalconstraints and fiscal policy outcomes. In the first two chapters, we focus on thelevel of detail of a government’s budget, analyzing two budgetary institutions, thenumber of line-item appropriations and the number of appropriation bills. In thethird chapter, we investigate commodity tax competition between two countriesthat differ in size and transportation cost. Finally, in the fourth chapter, we analyzeinvestments in a state’s fiscal capacity, letting public goods accumulate.In Chapter 1, we analyze a budget’s level of detail, focusing on the numberof line-item appropriations. The executive authority receives the right for discretionary spending via appropriation bills approved by the legislative authority. Anappropriation bill is composed of line-item appropriations that restrict the allocation of the authorized budget. We take Baron and Ferejohn (1989) as a startingpoint to develop a model of legislative bargaining in which two legislators decideon the number of line-item appropriations, choosing between one- and two-itembudgets, and on the provision of two public goods. A trade-off between flexibilityand commitment emerges in choosing the number of line-item appropriations.While a low probability of polarization between legislators leads to a one-itembudget, a high probability of polarization leads to a two-item budget. Moreover, ahigh probability of polarization between legislators increases government spending.We extend our model to analyze the line-item veto right and flexible line-itemappropriations.In Chapter 2, we continue to investigate a budget’s level of detail, concentrating on the number of appropriation bills. In the first chapter, we assumed that theappropriation-bill count is fixed, but the number of line-items in a bill is flexible.In this chapter, we assume that an appropriation bill’s line-item count is fixed butthe number of bills is flexible. Moreover, in the previous chapter, a budget’s levelof detail and its size and composition are determined at the same time. In thischapter, a budget’s level of detail is determined first, and its size and compositionare fixed subsequently. Specifically, two legislators first decide on the number ofappropriation bills, choosing between one- and two-bill budgeting, and subsequentlyon the provision of two public goods. While two-bill budgeting is more costly,it offers the executive authority commitment opportunity. We show that whenpolarization between legislators is high, public-good provision is higher under twobill budgeting than under one-bill budgeting. Moreover, a high polarization andmore equal distribution of political power between legislators encourages two-billbudgeting. We extend our model to analyze group-specific transfers.In Chapter 3, we analyze commodity tax competition between two countries.Kanbur and Keen (1993) and Nielsen (2001) offer two models to analyze commoditytax competition between two countries that differ in size. Nielsen’s model providesa simpler setting as it gives continuous best-response functions. In both modelsthere always exists a unique equilibrium in pure strategies in which the largercountry sets a higher tax rate. However, in both models transportation costs areassumed to be equal in two countries. We relax this assumption. We show thatthis leads to discontinuity of the best-response correspondences in Nielsen’s model.Moreover, existence of equilibrium in pure strategies is no longer guaranteed ineither model. We give necessary and sufficient conditions for the existence of equilibrium in pure strategies in both models. Additionally, we show that, whenan equilibrium in pure strategies does not exist, there can exist an equilibrium inmixed strategies in which the larger country sets a lower tax rate with a positiveprobability in both models.Finally, in Chapter 4, we turn our attention to a state’s capacity to raise taxes.Besley and Persson (2010) propose a model in which two groups in a society decideon government policy – taxes and provision of a public good – and investment instate capacity to collect taxes, also known as fiscal capacity. One of the authors’main results is that an increase in the expected value of the public good increasesinvestment in fiscal capacity. However, the authors assume that the public gooddepreciates completely in a period. As Battaglini and Coate (2007) state, mostpublic goods accumulate over time. We add accumulation of the public good tothe Besley-Persson model. We show that an increase in the expected value of thepublic good can decrease fiscal-capacity investment in this case. Moreover, anincrease in the depreciation rate of the public good increases it.
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