Government Policy with Time Inconsistent Voters
Alberto Bisin, Alessandro Lizzeri, Leeat Yariv
American Economic Review · 2015 · Volume 105 · Issue 6
Abstract
Behavioral economics presents a "paternalistic" rationale for benevolent government intervention. This paper presents a model of public debt where voters have self-control problems and attempt to commit using illiquid assets. In equilibrium, government accumulates debt to respond to individuals' desire to undo their commitments, which leads individuals to rebalance their portfolio, in turn feeding into a demand for further debt accumulation. As a consequence, (i) large (and distortionary) government debt accumulation occurs, and (ii) banning illiquid assets could improve individuals' welfare. These results offer a new rationale for balanced budget rules in constitutions to restrain governments' responses to voters' self-control problems. (JEL D2, D72, D78, H62, H63)
Keywords
Institutions: Design, Formation, Operations, and Impact, Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior, Positive Analysis of Policy Formulation and Implementation, National Deficit, Surplus, National Debt, Debt Management, Sovereign Debt
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