SOFT BUDGET CONSTRAINTS, TAXES, AND THE INCENTIVE TO COOPERATE

This paper applies the tacit coordination framework to the political macroeconomic context. The macroeconomic equilibrium is the outcome of an administration, consisting of a large number of decision makers whose horizon, being endogenously determined by their behavior, is uncertain. The public imposes a degree of discipline on the policy makers by its option to replace the administration, and the administration imposes discipline on the policy makers by monitoring their effective expenditure. Adverse shocks or a shorter horizon are shown to reduce cooperation among policy makers and increase the inflation rate and the use of discretionary taxes.