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Optimal Pre-commitment in Macro-economic Policy: A Game Theoretic Analysis of Fiscal Policy

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  • Evans, Martin D D

Abstract

This paper proposes a new solution to the problem of time inconsistency that arises in dynamic policy games played between the government and the public. In a Stackelberg game, a subgame-perfect equilibria is found in which members of the public employ trigger strategies in response to a sequence of policies chosen by the government. The government's precommitment to a particular policy is determined endogenously as part of its optimal strategy. In a simple political model of fiscal policy, the proposed equilibrium is used to show why a government will tolerate a rise in debt well above its targeted level. Copyright 1990 by Royal Economic Society.

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  • Evans, Martin D D, 1990. "Optimal Pre-commitment in Macro-economic Policy: A Game Theoretic Analysis of Fiscal Policy," Oxford Economic Papers, Oxford University Press, vol. 42(4), pages 695-714, October.
    • Handle: RePEc:oup:oxecpp:v:42:y:1990:i:4:p:695-714
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