Working Paper: NBER ID: w2759
Authors: Guido Tabellini; Alberto Alesina
Abstract: This paper analyzes a model in which different rational individuals vote over the composition and time profile of public spending. Potential disagreement between current and future majorities generates instability in the social choice function that aggregates individual preferences. In equilibrium a majority of the voters may favor a budget deficit. The size of the deficit under majority rule tends to be larger the greater is the polarization between current and potential future majorities. The paper also shows that the ex-ante efficient equilibrium of this model involves a balanced budget. A balanced budget amendment, however, is not durable under majority rule.
Keywords: budget deficit; political polarization; fiscal policy
JEL Codes: H62; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disagreement between current and future majorities (D72) | instability in the social choice function (D71) |
| instability in the social choice function (D71) | budget deficit (H62) |
| polarization of preferences among voters (D72) | size of budget deficits (H68) |
| political dynamics (D72) | fiscal policy outcomes (E62) |
| current voters favor deficits (H62) | do not fully internalize future costs (D62) |
| balanced budget is ex-ante optimal policy (E62) | not durable under majority rule (D72) |