TITLE

A Test for Household Behavior in Response to Government Activities

AUTHOR(S)
Vegari, Sheila
PUB. DATE
April 1988
SOURCE
Southern Economic Journal;Apr88, Vol. 54 Issue 4, p994
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The objective of this study is to shed some light on the crowding out argument. If an increase in government demand, financed either by taxes or by issuing debt, fails to stimulate total economic activity, the private sector is said to have been "crowded out" by the government action. We investigate the crowding out issue by focusing on households' reactions to fiscal activities. We ask the question: Do households view the government sector as an autonomous sector or do they view it as an extension of themselves? If the first interpretation is found to be correct, then the traditional fiscal policy analysis would remain valid. If the second argument is supported, government activity has no effect on the level of income. We explore these issues by testing the ultra-rational behavior of households as suggested by David and Scadding [4]. Ultra-rational households subsume government activities in their own budget allocation decisions such that government actions are neutralized. This study used a transcendental logarithmic utility function to test for the crowding out argument by examining the household's behavior in response to government activities. The utility function included as arguments, present and future consumption of public as well as private goods.
ACCESSION #
4631684

 

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