The Political Economy of Debt and Entitlements

Alessandro Lizzeri, Laurent Bouton and Nicola Persico

No 11459, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 five main results. First, debt and entitlement are strategic substitutes in the sense that constraining debt increases entitlements (and vice versa). Second, if entitlements are unconstrained, it is sometimes beneficial not to constrain debt (even in the absence of shocks that require smoothing). Third, if debt is unconstrained, it is beneficial to limit entitlements but not to eliminate them. Fourth, debt and entitlements respond in opposite ways to political instability and, in contrast with prior literature, political instability may even reduce debt when entitlements are endogenous. Finally, we identify a possible explanation for the joint growth of debt and entitlements.

Keywords: Government debt; Entitlement programs; Fiscal rules; Political economy (search for similar items in EconPapers)
JEL-codes: D72 E62 H60 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The Political Economy of Debt and Entitlements (2020)
Working Paper: The Political Economy of Debt and Entitlements (2019)
Working Paper: The Political Economy of Debt and Entitlements (2018)
Working Paper: The Political Economy of Debt and Entitlements (2016)
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