Working Paper: NBER ID: w22570
Authors: Laurent Bouton; Alessandro Lizzeri; Nicola Persico
Abstract: This paper presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.
Keywords: Debt; Entitlements; Fiscal Rules; Political Economy
JEL Codes: D72; E62; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital market frictions (G19) | government behavior regarding fiscal rules and entitlement programs (H51) |
| preference polarization (D72) | simultaneous growth of debt and entitlements (H60) |
| endogenous entitlements (H55) | debt accumulation incentives (H63) |
| debt accumulation incentives (H63) | total government obligations (H63) |
| endogenous entitlements (H55) | total government obligations (H63) |
| fiscal rules (unconstrained entitlements) (E62) | worse outcomes for all groups involved (I14) |