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Rotten parents and disciplined children: A politico-economic theory of public expenditure and debt


Storesletten, Kjetil; Song, Zheng; Zilibotti, Fabrizio (2012). Rotten parents and disciplined children: A politico-economic theory of public expenditure and debt. Econometrica, 80(6):2785-2803 .

Abstract

This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, i.e., low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.

Abstract

This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, i.e., low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:November 2012
Deposited On:07 Dec 2012 11:13
Last Modified:12 Mar 2017 06:47
Publisher:Wiley-Blackwell
ISSN:0012-9682
Additional Information:The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or other commercial purpose without the explicit permission of the Econometric Society. For this purpose, contact Claire Sashi, General Manager, at sashi@econometricsociety.org.
Publisher DOI:https://doi.org/10.3982/ECTA8910
Related URLs:http://dx.doi.org/10.5167/uzh-52280

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