Public Finance in the Context of Institutional Contract Theory
 
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Publish date: 2012-03-31
 
Gospodarka Narodowa 2012;254(3):85–105
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ABSTRACT
The article focuses on public finance as a mechanism for raising funds for public budgets, a mechanism made up of tax and lending contracts. The author applies an institutional analysis method in which the basic analysis unit is the transaction. The method classifies institutions and organizations and identifies the parties to transactions and transaction attributes. The parties to a tax contract are the State Treasury, local government authorities and taxpayers, and the contract involves the levying, setting and collection of taxes. Public agreements and market transactions with entities in the real economy and banks are made as part of a tax contract. The parties to a Treasury loan contract, on the other hand, are the State Treasury (on account of its demand for loan funds), buyers of Treasury debt securities and municipal bonds, and banks as either lenders or buyers of securities. Market transactions and public contracts are made between the government and entities in the real economy and banks. Such transactions concern the servicing of trade in Treasury securities. The author defines the institutional attributes of individual transactions, such as the nature of assets, and the frequency and uncertainty of a transaction. In the case of tax contracts, transactions with the highest level of institutional attributes include an agreement on the drafting and implementation of tax laws, the terms and conditions of eligibility for tax breaks, and tax collection. In the case of Treasury loan contracts, on the other hand, transactions with the highest level of institutional attributes include agreements on the sale of Treasury securities in all forms and agreements on Treasury guarantees and rating services. A comparison of the contracts shows that, in a Treasury loan contract, there are more transactions, contractual parties, transactions with a high level of institutional attributes, but also more opportunities for negotiation. Both types of contracts involve a fundamental transformation: competition steadily evolves into bilateral cooperation and a bilateral monopoly as the level of asset specificity grows when the contract is carried out.
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ISSN:0867-0005