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The Political Economy of Debt and Entitlements

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  • Bouton, Laurent
  • Lizzeri, Alessandro
  • Persico, Nicola

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 five main results. First, debt and entitlement are strategic substitutes in the sense that constraining debt increases entitlements (and vice versa). Second, if entitlements are unconstrained, it is sometimes beneficial not to constrain debt (even in the absence of shocks that require smoothing). Third, if debt is unconstrained, it is beneficial to limit entitlements but not to eliminate them. Fourth, 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

  • Bouton, Laurent & Lizzeri, Alessandro & Persico, Nicola, 2016. "The Political Economy of Debt and Entitlements," CEPR Discussion Papers 11459, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11459
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    References listed on IDEAS

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    Cited by:

    1. Facundo Piguillem & Alessandro Riboni, 2018. "Fiscal Rules as Bargaining Chips," EIEF Working Papers Series 1804, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2018.

    More about this item

    Keywords

    entitlement programs; fiscal rules; Government Debt; political economy;

    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
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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