Government Policy with Time Inconsistent Voters

Alberto Bisin, Alessandro Lizzeri and Leeat Yariv

American Economic Review, 2015, vol. 105, issue 6, 1711-37

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)

JEL-codes: D02 D72 D78 H62 H63 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20131306
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Citations: View citations in EconPapers (84)

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Working Paper: Government Policy with Time Inconsistent Voters (2012)
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