THE POLITICAL-ECONOMY OF PUBLIC SAVINGS AND THE ROLE OF CAPITAL MOBILITY

This paper explains public saving and investment in economies where ma ny groups compete for scarce public funds. We show that there is a col lective action problem. If there is no strong center, then this proble m manifests itself in a very low savings and investment rates. In the extreme, current spending may be determined simply by the current tax income and access to borrowing. This explains why in the face of a tem porary boom, governments may not save but may even borrow more to fina nce even higher levels of expenditure. We deal also with several mitig ating factors (repetition, insiders-outsiders interaction, elections). (C) 1998 Elsevier Science B.V. All rights reserved.