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  3. American Economic Review
  4. June 2015
  5. Government Policy with Time Inconsistent Voters

Government Policy with Time Inconsistent Voters

  • Alberto Bisin
  • Alessandro Lizzeri
  • Leeat Yariv
American Economic Review
vol. 105, no. 6, June 2015
(pp. 1711-37)
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Abstract

Behavioral economics presents a "paternalistic" rationale for benevolent government intervention. This paper presents a model of public debt where voters have self-control problems and attempt to commit using illiquid assets. In equilibrium, government accumulates debt to respond to individuals' desire to undo their commitments, which leads individuals to rebalance their portfolio, in turn feeding into a demand for further debt accumulation. As a consequence, (i) large (and distortionary) government debt accumulation occurs, and (ii) banning illiquid assets could improve individuals' welfare. These results offer a new rationale for balanced budget rules in constitutions to restrain governments' responses to voters' self-control problems. (JEL D2, D72, D78, H62, H63)

Citation

Bisin, Alberto, Alessandro Lizzeri, and Leeat Yariv. 2015. "Government Policy with Time Inconsistent Voters." American Economic Review, 105 (6): 1711-37. DOI: 10.1257/aer.20131306

Additional Materials

JEL Classification

  • D02 Institutions: Design, Formation, Operations, and Impact
  • D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • D78 Positive Analysis of Policy Formulation and Implementation
  • H62 National Deficit; Surplus
  • H63 National Debt; Debt Management; Sovereign Debt