Econometrica: Nov 2012, Volume 80, Issue 6
Rotten Parents and Disciplined Children: A Politico‐Economic Theory of Public Expenditure and Debt
Zheng Song, Kjetil Storesletten, Fabrizio ZilibottiThis 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, that is, 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.
Log In To View Full Content