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Government Saving with Limited Commitment

Listed author(s):
  • Ivan Werning

    (Massachusetts Institute of Technology)

  • Dan Cao

    (Georgetown University)

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.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 110.

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Date of creation: 2012
Handle: RePEc:red:sed012:110
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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