Fiscal constitutions and the determinacy of intergenerational transfers

Costas Azariadis and Vincenzo Galasso

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We study the impact offiscal constitutions on intergenerational transfers by analyzing how political veto power influences social security. Transfers in this paper are outcomes of an infinite-horizon social security game among selfish agents whose lifecycles we embed in an overlapping generation model with a linear technology. Policies are decided one period at a time and may change later at zero cost. Simple majoritarian systems, which accord the current median voter maximum fiscal discretion alld minimal influence over future policy, are known to sustain as subgame perfect equilibria all individually rational allocations. Among these are a continuum of stationary sequences (including dynamically inefficient ones) as well as a double continuum of non-stationary sequences (including cyclical or chaotic ones). We investigate how equilibrium is pinned down by constitutional "rules" that give minorities veto power over fiscal policy changes proposed by the majority. Veto power turns out to be equivalent to precommitment. Among subgame perfect equilibria, it eliminates fluctuating and dynamically inefficient transfers, reducing the equilibrium set to weakly increasing transfer sequences that converge to the golden rule. Veto power combined with Markov perfect equilibrium results in a unique, dynamic efficient allocation - the golden rule.

Keywords: Intergenerational; transfers; Veto; power; Constitutional; rules (search for similar items in EconPapers)
Date: 1997-10
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Citations: View citations in EconPapers (2)

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