Economic and Politico-Economic Equivalence of Fiscal Policies

We consider intergenerational transfer policies that are equivalent in terms of the allocation they support, in particular pay-as-you-go financed policies on one hand and policies with explicit government debt on the other. We analyze the conditions under which political decision makers are indifferent between such "economically equivalent" policies, i.e., the conditions under which a policy constitutes a politico-economic equilibrium if an economically equivalent policy does. We apply our findings to results in the recent literature on politico-economic equilibria with social security. Our results imply that many other fiscal policies beyond the pure social security policies considered in those papers support politico-economic equilibria as well. We also discuss the implications of our results for social security reform.