A model of the optimal allocation of government expenditures

Simon FAN, Yu PANG*, Pierre PESTIEAU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

Abstract

Government expenditures can be used for various socioeconomic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay‐as‐you‐go intergenerational contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the steady state.
Original languageEnglish
JournalJournal of Public Economic Theory
DOIs
Publication statusE-pub ahead of print - 19 Nov 2019

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Keywords

  • government spending
  • individual heterogeneity
  • public consumption
  • public education

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