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Government Saving with Limited Commitment

Author

Listed:
  • Ivan Werning

    (Massachusetts Institute of Technology)

  • Dan Cao

    (Georgetown University)

Abstract

This paper builds a continuous time model of government saving behavior. The model features rulers that rotate out of power. The ruler makes two decisions: a. total spending expenditure; and b. the composition of spending between two goods, one with public benefits and another with private benefits for the ruling government ("pork spending"). We assume that preferences are such that pork spending rises with total spending but that the fraction spent on pork falls with rising total spending. In equilibrium, for intermediate values of the interest rate, government debt dynamics are affected by initial conditions: above a certain level of debt there is overspending so that debt remains high in a "poverty trap"; below this threshold, debt falls and the government eventually accumulates assets.

Suggested Citation

  • Ivan Werning & Dan Cao, 2012. "Government Saving with Limited Commitment," 2012 Meeting Papers 110, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:110
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    References listed on IDEAS

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