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Fiscal Risk and the Portfolio of Government Programs

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Bibliographic Details
Other Authors: Sunderam, Adi [Other] • Scharfstein, David S. [Other]
Type of Resource: E-Book
Language: English
Cambridge, Mass National Bureau of Economic Research October 2016

Series: NBER working paper series
Source: Verbunddaten SWB
Lizenzfreie Online-Ressourcen
Summary: In this paper, we develop a new model for government cost-benefit analysis in the presence of risk. In our model, a benevolent government chooses the scale of a risky project in the presence of two key frictions. First, there are market failures, which cause the government to perceive project payoffs differently than private households do. This gives the government a "social risk management" motive: projects that ameliorate market failures when household marginal utility is high are appealing. The second friction is that government financing is costly because of tax distortions. This creates a "fiscal risk management" motive: incremental spending that occurs when total government spending is already high is particularly unattractive. A first key insight is that the government's need to manage fiscal risk frequently limits its capacity for managing social risk. A second key insight is that fiscal risk and social risk interact in complex ways. When considering many potential projects, government cost-benefit analysis thus acquires the flavor of a portfolio choice problem. We use the model to explore how the relative attractiveness of two technologies for promoting financial stability--bailouts and regulation--varies with the government's fiscal burden and characteristics of the economy
Physical Description: 1 Online-Ressource
Type of Resource: Mode of access: World Wide Web.
System requirements: Adobe [Acrobat] Reader required for PDF files.
DOI: 10.3386/w22763
Access: Open Access