Economic growth , fiscal policy , imperfectly informed governments , business perceptions , diagnostics , subjective data
Abstract:
This paper assesses the merits of using surveys of business perceptions of growth constraints as a guide to growth-enhancing fiscal policy reforms. Using endogenous growth models in which the government levies an income tax to provide public inputs to the production
of private firms, the paper demonstrates that business perceptions of
growth constraints are subject to systematic biases except when firms
compare different types of public services or different types of public
capital. In particular firms can be expected to systematically over-estimate the growth-enhancing effects of lower tax rates, and under-
estimate the growth-enhancing effects of greater provision of public
capital. It is then shown that these theoretical predictions regarding
how firms rank constraints correspond closely to the observed ranking
of constraints by firms in the World Bank's Enterprise Surveys.
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