Focus on the institutional split-up between a finance minister (taxer) and a spending minister (spender) incentive effects of earmarked taxation

This paper deals with earmarked taxation in an industrial-organization framework. It concentrates on the institutional split-up between a finance minister and a spending minister which are both either the government's or the parliament's agents. The ministers' decisions are linked by the special earmarked-budget constraint and by the demand interdependencies between the taxed private good and that good which is publicly provided, as, for instance, the demand for gasoline depends on the supply of highways. Private information of the ministers allows them to reap information rents and to follow personal Niskanen-type objectives. The paper shows the distortions in public-good supply, taxation and ministers' efforts which arise in such a setting.