The Political Economy of Debt and Entitlements

Laurent Bouton, Alessandro Lizzeri and Nicola Persico
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Laurent Bouton: Georgetown University
Nicola Persico: Northwestern University

Working Papers from Princeton University. Economics Department.

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, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits robustly lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Second, debt and entitlements respond in opposite ways to political instability and, in contrast with prior literature, political instability may even reduce debt when entitlements are endogenous. Finally, we identify a possible explanation for the joint growth of debt and entitlements.

Keywords: Government debt; entitlement programs; fiscal rules; political economy (search for similar items in EconPapers)
JEL-codes: D72 E62 H60 (search for similar items in EconPapers)
Date: 2019-09
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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 (2018)
Working Paper: The Political Economy of Debt and Entitlements (2016)
Working Paper: The Political Economy of Debt and Entitlements (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2019-27

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