Working Paper: CEPR ID: DP7860
Authors: Johannes Gerd Becker; Hans Gersbach; Oliver Grimm
Abstract: We examine debt-sensitive majority rules. According to such a rule, the higher a planned public debt, the higher the parliamentary majority required to approve it. In a two-period model we compare debt-sensitive majority rules with the simple majority rule when individuals differ regarding their benefits from public-good provision. We establish the existence of Condorcet winners under debt-sensitive majority rules and derive their properties. We find that equilibrium debt-levels are lower under the debt-sensitive majority rule if preferences regarding public goods are sufficiently heterogeneous and if the impact of debt on future public-good provision is sufficiently strong. We illustrate how debt-sensitive majority rules act as political stabilizers in the event of negative macroeconomic shocks.
Keywords: debt restriction; debtsensitive majority rule; fiscal policy; public debt; public goods; simple majority rule; voting
JEL Codes: D72; E61; H41; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debtsensitive majority rules (D72) | lower equilibrium debt levels (H63) |
| debtsensitive majority rules (D72) | increase majority required for debt approval (H63) |
| increase majority required for debt approval (H63) | reduce debt accumulation (H63) |
| debtsensitive majority rules (D72) | stabilize public debt levels during economic downturns (H63) |
| higher planned public debt (H69) | greater majority for approval (D79) |
| debtsensitive majority rules (D72) | create fiscal space (E62) |
| create fiscal space (E62) | stabilize the economy (E63) |