Working Paper: CEPR ID: DP8001
Authors: Hans Gersbach
Abstract: Politicians tend to push the amount of public debt beyond socially desirable levels in order to increase their reelection chances. We develop a model that provides a new explanation for this behavior: office holders undertake debt-financed public projects, but postpone the timing of part of the output to the next term. This makes it difficult to replace them. As a consequence, the office-holders' reelection chances rise -- as does public debt. As a potential remedy for this inefficiency, we allow candidates for public office to offer government debt-threshold contracts. Such a contract contains an upper limit for government debt and the sanction that an office-holder violating this limit cannot stand for reelection. We show that such competitively-offered contracts contain low debt levels that limit debt financing and improve the citizens' welfare. When negative macroeconomic events occur, government debt contracts may be violated, and such shocks are stabilized.
Keywords: Elections; Government Debt; Macroeconomic Shocks; Political Contracts
JEL Codes: D7; D82; H4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government debt levels (H63) | reelection chances (D72) |
| reelection chances (D72) | public debt levels (H63) |
| timing of output realization (C69) | reelection probabilities (D79) |
| GDTCs (Y10) | public debt levels (H63) |
| GDTCs (Y10) | citizen welfare (I39) |
| economic shocks (F69) | violation of debt thresholds (K35) |
| violation of debt thresholds (K35) | public debt levels (H63) |