Engineering Crises: Favoritism and Strategic Fiscal Indiscipline

41 Pages Posted: 20 Sep 2017

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Davide Ticchi

Marche Polytechnic University; affiliation not provided to SSRN; Department of Economics and Social Sciences

Andrea Vindigni

Università degli Studi di Genova

Date Written: September 2017

Abstract

If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt -- which makes crises more likely -- is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.

Keywords: Entitlements, favoritism, Fiscal Crises, inequality, political economy, public debt, State Capacity.

JEL Classification: E62, F34, H12, H6, O11, P16

Suggested Citation

Saint-Paul, Gilles and Ticchi, Davide and Vindigni, Andrea, Engineering Crises: Favoritism and Strategic Fiscal Indiscipline (September 2017). CEPR Discussion Paper No. DP12291. Available at SSRN: https://ssrn.com/abstract=3039016

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France
+33 5 6112 8544 (Phone)
+33 5 6122 5563 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Davide Ticchi

Marche Polytechnic University ( email )

Piazzale Martelli 8
Ancona, 60121
Italy

affiliation not provided to SSRN

Department of Economics and Social Sciences ( email )

Piazzale Martelli 8
Ancona, 60121
Italy

Andrea Vindigni

Università degli Studi di Genova ( email )

Via Vivaldi 5
Genova, 16126
Italy

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