Working Paper: NBER ID: w2308
Authors: Alberto Alesina; Guido Tabellini
Abstract: This paper considers an economy in which policymakers with different preferences concerning fiscal policy alternate in office as a result of democratic elections. It is shown that in this situation government debt becomes a strategic variable used by each policymaker to influence the choices of his successors. In particular, if different policymakers disagree about the desired composition of government spending between two public goods, the economy exhibits a deficits bias. Namely, in this economy debt accumulation is higher than it would be with a social planner. According to the results of our model, the equilibrium level of government debt is larger: the larger is the degree of polarization between alternating governments; and the more likely it is that the current government will not be reelected. The paper has empirical implications which may contribute to explain the current fiscal policies in the United States and in several other countries.
Keywords: Fiscal Deficits; Government Debt; Democracy; Public Goods
JEL Codes: H63; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| degree of polarization between parties (D72) | equilibrium stock of debt (H63) |
| likelihood of current government not being reappointed (D72) | equilibrium stock of debt (H63) |
| constraints on providing minimum levels of public goods (H49) | equilibrium stock of debt (H63) |
| disagreement among governments (F53) | deficit bias (H62) |
| deficit bias (H62) | higher debt accumulation (H63) |
| lack of binding commitments (D86) | leaving debts for successors (D14) |