Working Paper: NBER ID: w22406
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. Also in line with the theory, we find that debt is lower when the probability of a negative shock to the economy in the second period is higher, evidence that debt is used to smooth consumption.
Keywords: Public Debt; Political Economy; Laboratory Experiment
JEL Codes: C92; H11; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher majority requirements (q) (C35) | lower public debt (H69) |
| higher majority requirements (q) (C35) | increased investment in public goods (H40) |
| public debt (H63) | consumption smoothing (D15) |
| voting rules (K16) | public debt (H63) |
| voting rules (K16) | public goods provision (H41) |