2000 Fiscal Year Final Research Report Summary
THEORETICAL ANALYSIS ON A DYNAMIC GAME OF FISCAL RECONSTRUCTION
| Project/Area Number |
10630084
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| Research Category |
Grant-in-Aid for Scientific Research (C)
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| Allocation Type | Single-year Grants |
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| Section | 一般 |
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| Research Field |
Public finance/Monetary economics
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| Research Institution | HOKKAIDO UNIVERSITY |
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Principal Investigator |
ITAYA Jun-ichi GRADUATE SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION, HOKKAIDO UNIVERSITY, PROF., 大学院・経済学研究科, 教授 (20168305)
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| Project Period (FY) |
1998 – 2000
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| Keywords | FISCAL RECONSTRUCTION / DYNAMIC GAME / NASH EQUILIBRIUM / INTEREST GROUP |
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| Research Abstract |
This paper investigates dynamic properties of fiscal reconstruction by analyzing the infinite duration differential game among various interest groups with a framework of voluntary acceptance of tax burden.
(1) By comparing the first-best solution of fiscal reconstruction, the open-loop Nash equilibrium path, and the feedback Nash equilibrium path, we highlight the free riding behavior of interest groups in the process of fiscal reconstruction.
(2) We derive explicitly the target levels of government debt and primary expenditures, and the adjustment speed of fiscal reconstruction under the respective solutions.
(3) We finally examine the impacts of consumption taxes on their adjustment speeds as well as long-run outcomes of the respective paths. We also consider the implication of raising taxes to attain fiscal reconstruction and its effect on the size of government. Although consumption taxes bring a lot of revenues, the sole use of consumption taxes does not necessarily alleviate the fiscal crisis, resulting in enlarging the size of government. An increase in consumption taxes combined with positive uniform transfers raises the relative price of consumption in terms of privileges without raising the marginal cost of giving up privileges in terms of government revenue, inducing earlier concession and better fiscal reconstruction.
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