FISCAL ILLUSION AND THE OUTPUT EXPANSION HYPOTHESIS

In the traditional certainty model of voter fiscal illusion, voters mi sperceive nonstochastic tax prices as being lower than they actually a re and therefore allow public sector officials to expand output beyond the perfect information output. This article shows how modeling fisca l illusion as imperfect voter information or uncertainty introduces an additional risk term that offsets the certainty model illusion-output expansion effect. The fiscal illusion-output expansion hypothesis is evaluated by empirically examining the impact of fiscal structure comp lexity, both with respect to sources and uses of revenues, on public e xpenditure demand. In keeping with the uncertainty model of fiscal ill usion, the data reveal little support for the illusion-output expansio n hypothesis.