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The Political Economy of Debt and Entitlements

Author

Listed:
  • Laurent Bouton
  • Alessandro Lizzeri
  • Nicola Persico
Abstract
This paper presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.

Suggested Citation

  • Laurent Bouton & Alessandro Lizzeri & Nicola Persico, 2016. "The Political Economy of Debt and Entitlements," NBER Working Papers 22570, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22570
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    Cited by:

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    2. Grechyna, Daryna, 2021. "Mandatory spending, political polarization, and macroeconomic volatility," European Journal of Political Economy, Elsevier, vol. 68(C).
    3. Gianmarco Daniele & Amedeo Piolatto & Willem Sas, 2018. "Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation," Working Papers. Serie AD 2018-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Gersbach, Hans & Jackson, Matthew O. & Muller, Philippe & Tejada, Oriol, 2023. "Electoral competition with costly policy changes: A dynamic perspective," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Zapal, Jan, 2020. "Simple Markovian equilibria in dynamic spatial legislative bargaining," European Journal of Political Economy, Elsevier, vol. 63(C).
    6. Pierre C. Boyer & Brian Roberson & Christoph Esslinger, 2024. "Public Debt and the Political Economy of Reforms," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 459-491, August.
    7. Schilling, Linda, 2020. "On the (Ir)relevance of Firm Size for Bail-outs under Voter-Neutrality: The Case of Foreign Stakeholders," CEPR Discussion Papers 15508, C.E.P.R. Discussion Papers.
    8. Facundo Piguillem & Alessandro Riboni, 2021. "Fiscal Rules as Bargaining Chips [Growth in the Shadow of Expropriation]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2439-2478.
    9. Maximilian Kellner, 2023. "Strategic effects of stock pollution: the positive theory of fiscal deficits revisited," Public Choice, Springer, vol. 194(1), pages 157-179, January.
    10. Gersbach, Hans & Muller, Philippe & Tejada, Oriol, 2019. "Costs of change and political polarization," European Journal of Political Economy, Elsevier, vol. 60(C).
    11. Gianmarco Daniele & Amedeo Piolatto & Willem Sas, 2020. "Does the Winner Take It All? Redistributive Policies and Political Extremism," Working Papers 1157, Barcelona School of Economics.
    12. Uchida, Yuki & Ono, Tetsuo, 2021. "Borrowing to finance public investment: a politico-economic analysis of fiscal rules," MPRA Paper 115844, University Library of Munich, Germany, revised 31 Dec 2022.
    13. Chistoph Grosse-Steffen & Laura Pagenhardt & Malte Rieth, 2021. "Committed to Flexible Fiscal Rules," Working papers 854, Banque de France.
    14. Jocelyne Zoumenou, 2023. "On the impact of fiscal policy on inflation: The case of fiscal rules," EconomiX Working Papers 2023-21, University of Paris Nanterre, EconomiX.
    15. Marina Azzimonti & Gabriel P. Mihalache & Laura Karpuska, 2020. "Bargaining over Taxes and Entitlements," NBER Working Papers 27595, National Bureau of Economic Research, Inc.
    16. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    17. Daniele, Gianmarco & Piolatto, Amedeo & Sas, Willem, 2024. "Does the winner take it all? Federal policies and political extremism," Regional Science and Urban Economics, Elsevier, vol. 105(C).
    18. Osband, Kent & Filoso, Valerio & Capasso, Salvatore, 2024. "The limits of limitless debt," Journal of Macroeconomics, Elsevier, vol. 79(C).

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    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; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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