The Political Economy of Debt and Entitlements

45 Pages Posted: 31 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

Multiple version iconThere are 2 versions of this paper

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 the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.

Suggested Citation

Bouton, Laurent and Lizzeri, Alessandro and Persico, Nicola, The Political Economy of Debt and Entitlements (August 2016). NBER Working Paper No. w22570, Available at SSRN: https://ssrn.com/abstract=2832574

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
6
Abstract Views
190
PlumX Metrics