Working Paper: CEPR ID: DP13097
Authors: Marco Battaglini; Salvatore Nunnari; Thomas R. Palfrey
Abstract: This paper reports the results from a laboratory experiment designed to study political distortions in the accumulation of public debt. A legislature bargains over the levels of a public good and of district specific transfers in two periods. The legislature can issue or purchase risk-free bonds in the first period and the level of public debt creates a dynamic linkage across policymaking periods. In line with the theoretical predictions, we find that public policies are inefficient and efficiency is increasing in the size of the majority requirement, with higher investment in public goods and lower debt associated with larger majority requirements. Debt is lower when the probability of a negative shock to the economy in the second period is higher indicating that even in a political equilibrium debt is used to smooth consumption and to insure against political uncertainty. Finally, also in line with the theoretical predictions, we find that dynamic distortions are eliminated independently of the voting rule when the first period majority can commit to a policy for the second period. The experiment however highlights two phenomena that are surprising in terms of standard theory and have not been previously documented. First, balancing the budget in each period is a focal point, leading to lower distortions than predicted. Second, higher majority requirements induce significant delays in reaching an agreement.
Keywords: dynamic political economy; public debt; bargaining; laboratory experiments
JEL Codes: D71; D72; C78; C92; H41; H54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| probability of a negative economic shock (p) (D80) | public debt (H63) |
| size of the majority requirement (q) (C35) | public good investment (H40) |
| size of the majority requirement (q) (C35) | public debt (H63) |
| commitment ability of the legislature (D72) | dynamic inefficiencies (D61) |
| behavioral norms (C92) | policy outcomes (D78) |
| size of the majority requirement (q) (C35) | legislative efficiency (D72) |