Majority Choice Determination of the Level of Non-Neutral Government Debt

Simon Benninga

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: With incomplete financial markets government debt may be non-neutral even if individuals perceive that the value of the debt is the discounted value of future taxes and there are no opportunities for individuals to shift the tax burden among themselves. Non-neutrality arises because of the effects of a change in future taxation on individuals’ consumption sets. There exists a taxation vector which cannot be defeated by a majority vote of consumers, when these are asked about their preferences as between this taxation vector and any other taxation vector. The equilibrium is non-manipulable and thus stable.

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