Working Paper: NBER ID: w3053
Authors: Alberto Alesina; Allan Drazen
Abstract: When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes a "war of attrition", with each group finding it rational to attempt to wait the others out. Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We also motivate this approach and its results by comparison to historical episodes.
Keywords: stabilization; fiscal policy; distributional conflict
JEL Codes: E63; H12; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity of socioeconomic groups (I24) | delays in stabilization (E63) |
| political consolidation (F55) | timing of stabilization (E63) |
| socioeconomic status of groups (I24) | burden of stabilization costs (E63) |
| distribution of income (D31) | timing of stabilization (E63) |