Understanding the Emergence of Public Debt

36 Pages Posted: 25 Jun 2014

See all articles by Martin Fochmann

Martin Fochmann

University of Cologne

Abdolkarim Sadrieh

University of Magdeburg

Joachim Weimann

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: May 24, 2014

Abstract

We use a controlled laboratory experiment with and without overlapping generations to study the emergence of public debt. Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes. With a single generation, public debt is accumulated prudently, never leading to over-indebtedness. With multiple generations, public debt is accumulated rapidly as soon as the burden of debt and the risk of over-indebtedness can be shifted to future generations. Debt ceiling mechanisms do not mitigate the debt problem. With overlapping generations, political debt cycles emerge, oscillating with the age of the majority of voters.

Keywords: public debt and taxation, government spending, budget deficit, balanced budget, common pool resources

JEL Classification: C92, H41, H63

Suggested Citation

Fochmann, Martin and Sadrieh, Abdolkarim and Weimann, Joachim, Understanding the Emergence of Public Debt (May 24, 2014). CESifo Working Paper Series No. 4820. Available at SSRN: https://ssrn.com/abstract=2458325

Martin Fochmann

University of Cologne ( email )

Albertus-Magnus-Platz
Behavioral Accounting/Taxation/Finance
Cologne, 50923
Germany

HOME PAGE: http://www.taxation.uni-koeln.de/de/team/prof-dr-martin-fochmann/

Abdolkarim Sadrieh

University of Magdeburg ( email )

Faculty of Economics and Management
Postbox 4120
39016 Magdeburg
Germany

HOME PAGE: http://www.ww.uni-magdeburg.de

Joachim Weimann (Contact Author)

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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