Intergenerational Politics, Government Debt and Economic Growth

This paper develops a two-period overlapping-generations model featuring en- dogenous growth and intergenerational conflict over fiscal policy. In particular, the paper characterizes a Markov-perfect political equilibrium of the voting game be- tween generations, and shows the following results. First, in an unbalanced budget case, the government borrows or lends in the capital market depending on the share of capital in production. Second, when the government borrows in the capital mar- ket, an introduction of a balanced budget rule results in a higher growth rate. Third, to obtain a normative implication of the political equilibrium, the paper considers a benevolent planner with a commitment technology, and shows that the planner always chooses to lend in the capital market to save more for future generations and thus attains a higher growth rate than the government in a political equilibrium.