The Korean Economic Review
Separation of Two Agencies for Fiscal Policies
Sangwon Park (Hankuk University of Foreign Studies)Year 2013Vol. 29No. 2
This paper studies the effect of separation of government agencies on fiscal policies. We construct a model with moral hazard which compares the integrated system and the separated system. In the separated system, two independent agencies are in charge of taxes and government expenditure, respectively. Meanwhile, in the integrated system, one agency decides on both policies. In both systems, there is a third party which provides information on the effectiveness of government expenditure only to the budget agency and is willing to overstate in order to acquire more budget. It is shown that the separated system is better at controlling the information provider’s incentive to mislead and can be superior under some parameter values in spite of its coordination problem.