We thank the editor (Harald Uhlig) and five referees, as well as Daron Acemoglu, Marco Bassetto, Michele Boldrin, Kenneth Judd, Per Krusell, Roger Lagunoff, Sigrid Röhrs, Victor Ríos-Rull, Jaume Ventura, Pierre Yared, and seminar participants at several institutions for comments. Zheng Song acknowledges the financial support from Fudan University (985 platform) and the Social Science Foundation of China (06CJL004). Kjetil Storesletten acknowledges the support of the Norwegian Research Council via ESOP and via a Young Outstanding Researcher grant. Fabrizio Zilibotti acknowledges the support of the European Research Council (ERC Advanced Grant IPCDP-229883).
Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt
Article first published online: 26 NOV 2012
© 2012 The Econometric Society
Volume 80, Issue 6, pages 2785–2803, November 2012
How to Cite
Song, Z., Storesletten, K. and Zilibotti, F. (2012), Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt. Econometrica, 80: 2785–2803. doi: 10.3982/ECTA8910
- Issue published online: 26 NOV 2012
- Article first published online: 26 NOV 2012
- Manuscript received October, 2009; final revision received November, 2011.
- Fiscal policy;
- general equilibrium;
- government debt;
- intergenerational conflict;
- Markov equilibrium;
- political economy;
- public goods;
- repeated voting;
- small open economies
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, 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.