Fiscal Choices and Economic Outcomes
Chapter 3: The Parameters
Most of the economic and political parameters of the models described in the prior chapter can be estimated from observed data. For this study, the several sets of parameters used to estimate the ﬁscal choices and economic outcomes of the alternative political regimes are based on recent US data. THE ECONOMIC PARAMETERS The ﬁrst task is to estimate the parameters a, b, and c of Equation 2.1 (Chapter 2), the basic relation between ﬁscal choices and economic outcomes that is common to all regimes. The parameter a is arbitrary; this parameter aﬀects the levels but not the relative magnitudes of the ﬁscal and economic outcomes. In order to provide a basis for easy comparison of the outcomes of the several types of regimes, the parameter a is set at a level such that the output per potential worker in the reference case – a democracy with a broad franchise, majority rule, and a long-term ﬁscal horizon – is equal to 1,000. For this study, the parameters b and c are estimated by two independent techniques, in part to test the validity of the model of democratic government outlined in Chapter 2. The ﬁrst technique is to estimate the parameters b and c that are implicit in the actual levels of G and R for the United States in 1996, given the model of democratic government and the estimates (to be described later) of the political parameters d, e, and f, again for the United States in 1996. Solving Equation 2.13...
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