A Tale of Two Macroeconomic Issues: Public Spending and Households’ Preferences

This paper tries to explain how political/bureaucratic corruption in India affects households’ preferences of consumption-leisure, consumption-saving and consumption-demand of real balances decisions in a typical economy, dominated by the informal sector, and modeled in an open-economy New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) style with micro-foundations. The study incorporates the enormously important informal sector, as the lion’s share of Indian workforce is employed in this sector. It also does not keep the degree of political/bureaucratic corruption out, as thriving corruption has engulfed the entire nation. A theoretical model based on a representative household’s utility function comprising consumption, public consumption, real balances and labor supply (production) subject to its budget constraint is developed and solved. The paper shows, theoretically, that public spending on consumption, government transfer, political/bureaucratic corruption/embezzlement in public spending on consumption and political/bureaucratic corruption/embezzlement in government transfer do not affect households’ preferences of optimal consumption-saving decision (optimal intertemporal consumption decision), optimal consumption-leisure decision (optimal consumption-labor supply decision) and optimal consumption-demand of real balances decision.