Banking Investigate

Late Budgets

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Executive Summary

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 are 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. The authors build this model around budget baselines as reference points for loss adverse negotiators. They derive three testable hypotheses: there are more late budgets, and they are later, when fiscal circumstances change; when such changes are negative rather than positive; and when there is divided government.

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