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

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  • Song, Zheng Michael
  • Storesletten, Kjetil
  • Zilibotti, Fabrizio

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, i.e., 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.

Suggested Citation

  • Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2012. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," CEPR Discussion Papers 8738, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8738
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    More about this item

    Keywords

    Fiscal discipline; Fiscal policy; General equilibrium; Government debt; High debt in Greece and Italy; Intergenerational conflict; Markov equilibrium; Political economy; Public goods; Repeated voting;

    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
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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