The Political Economy of Debt and Entitlements

54 Pages Posted: 30 Aug 2016

See all articles by Laurent Bouton

Laurent Bouton

Georgetown University - Department of Economics

Alessandro Lizzeri

New York University - Department of Economics - Leonard N. Stern School of Business

Nicola Persico

Northwestern University - Kellogg School of Management

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Date Written: August 2016

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 five main results. First, debt and entitlement are strategic substitutes in the sense that constraining debt increases entitlements (and vice versa). Second, if entitlements are unconstrained, it is sometimes beneficial not to constrain debt (even in the absence of shocks that require smoothing). Third, if debt is unconstrained, it is beneficial to limit entitlements but not to eliminate them. Fourth, 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: entitlement programs, fiscal rules, Government Debt, political economy

JEL Classification: D72, E62, H60

Suggested Citation

Bouton, Laurent and Lizzeri, Alessandro and Persico, Nicola, The Political Economy of Debt and Entitlements (August 2016). CEPR Discussion Paper No. DP11459. Available at SSRN: https://ssrn.com/abstract=2831962

Laurent Bouton (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Alessandro Lizzeri

New York University - Department of Economics - Leonard N. Stern School of Business ( email )

19 West Fourth Street
New York, NY 10012
United States
212-998-8907 (Phone)
212-995-3932 (Fax)

Nicola Persico

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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