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The Political Economy of Debt and Entitlements

Author

Listed:
  • Laurent Bouton

    (Georgetown University)

  • Alessandro Lizzeri

    (New York University)

  • Nicola Persico

    (Northwestern University)

Abstract

This paper presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods, entitlements directly target the future allocation of resources. We prove the following results. First, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits robustly lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Second, debt and entitlements respond in opposite ways to political instability and, in contrast with prior literature, political instability may even reduce debt when entitlements are endogenous. Finally, we identify a possible explanation for the joint growth of debt and entitlements.

Suggested Citation

  • Laurent Bouton & Alessandro Lizzeri & Nicola Persico, 2019. "The Political Economy of Debt and Entitlements," Working Papers 2019-27, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2019-27
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    More about this item

    Keywords

    Government debt; entitlement programs; fiscal rules; political economy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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