The Political Economy of Debt and Entitlements

Laurent Bouton, Alessandro Lizzeri and Nicola Persico

No 22570, NBER Working Papers from National Bureau of Economic Research, Inc

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.

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
Note: POL
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Laurent Bouton & Alessandro Lizzeri & Nicola Persico, 2020. "The Political Economy of Debt and Entitlements," The Review of Economic Studies, vol 87(6), pages 2568-2599.

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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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