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The Political Economy of Public Debt: A Laboratory Study

Marco Battaglini (), Salvatore Nunnari () and Thomas Palfrey

No 22406, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper reports the results from a laboratory experiment designed to study political distortions in the accumulation of public debt. A legislature bargains over the levels of a public good and of district specific transfers in two periods. The legislature can issue or purchase risk-free bonds in the first period and the level of public debt creates a dynamic linkage across policymaking periods. In line with the theoretical predictions, we find that public policies are inefficient and efficiency is increasing in the size of the majority requirement, with higher investment in public goods and lower debt associated with larger majority requirements. Also in line with the theory, we find that debt is lower when the probability of a negative shock to the economy in the second period is higher, evidence that debt is used to smooth consumption.

JEL-codes: C92 H11 H41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-exp, nep-pbe and nep-pol
Date: 2016-07
Note: POL
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Published as Marco Battaglini, 2011. "The Political Economy of Public Debt," Annual Review of Economics, vol 3(1), pages 161-189.

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Related works:
Working Paper: The Political Economy of Public Debt: A Laboratory Study (2018) Downloads
Working Paper: The Political Economy of Public Debt: A Laboratory Study (2016) Downloads
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