An investigation of the delayed stabilisation hypothesis with experimental data

This paper empirically tests a version of the delayed stabilisation hypothesis, using experimental data. The hypothesis suggests the possibility of a stabilisation threshold at which a deficit bias due to common pool problem - government fragmentation is eliminated. Formulated along the line of a dynamic common pool problem earlier used in the natural resource environment literature, we extend the experimental design to a fiscal setting by including key features of the legislative bargaining game of 'divide-the-dollar'. The extent of government fragmentation is captured in the formulation by varying the size of interest groups across treatments. Our results do not support the prediction of delayed stabilisation. Moreover, deficit level tends to be highest in the period after post-stabilisation threshold predicted by the hypothesis. This finding suggests that adopting an active stabilisation policy is a more potent tool for policymakers, as against relying on budget actors to act endogenously to correct a deficit bias.