Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt

Zheng Song, Kjetil Storesletten, Fabrizio Zilibotti

Research output: Contribution to journalArticlepeer-review

Abstract

This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, that is, low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.

Original languageEnglish (US)
Pages (from-to)2785-2803
Number of pages19
JournalEconometrica
Volume80
Issue number6
DOIs
StatePublished - Nov 2012
Externally publishedYes

Keywords

  • Fiscal policy
  • General equilibrium
  • Government debt
  • Intergenerational conflict
  • Markov equilibrium
  • Political economy
  • Public goods
  • Repeated voting
  • Small open economies

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