Inefficiency in Legislative Policy-Making: A Dynamic Analysis

This paper develops an infinite horizon model of public spending and taxation in which policy
decisions are determined by legislative bargaining. The policy space incorporates both productive
and distributive public spending and distortionary taxation. The productive spending is investing in
a public good that benefits all citizens (e.g., national defense or air quality) and the distributive
spending is district-specific transfers (e.g., pork barrel spending). Investment in the public good
creates a dynamic linkage across policy-making periods. The analysis explores the dynamics of
legislative policy choices, focusing on the efficiency of the steady state level of taxation and
allocation of tax revenues. The model sheds new light on the efficiency of legislative policy-making
and has a number of novel positive implications.