EPRU Working Paper No. 2010-04
50 Pages Posted: 5 May 2010
Date Written: May 3, 2010
The budget forms the legal basis of government spending. If a budget is not in place at the beginning of the fiscal year, planning as well as current spending is jeopardized and government shutdown may result. This paper develops a continuous-time war-of-attrition model of budgeting in a presidential style-democracy to explain the duration of budget negotiations. We build our model around budget baselines as reference points for loss averse negotiators. We derive three testable hypotheses: there are more late budgets, and they are more late, when fiscal circumstances change; when such changes are negative rather than positive; and when there is divided government. We test the hypotheses of the model using a unique data set of late budgets for US state governments, based on dates of budget approval collected from news reports and a survey of state budget officers for the period 1988-2007. For this period, we find 23 % of budgets to be late. The results provide strong support for the hypotheses of the model.
Keywords: government budgeting, state government, presidential democracies, political economy, late budgets, fiscal stalemate, war of attrition
JEL Classification: D72, H11, H72, H83
Suggested Citation: Suggested Citation