American Economic Review Vol. 105 No. 6 2015

Government Policy with Time Inconsistent Voters

Alberto Bisin¹; Alessandro Lizzeri¹; Leeat Yariv²

¹ Department of Economics, New York University, 19 West 4th Street, New York, NY 10012 (e-mail: ) · ² Division of the Humanities and Social Sciences, Caltech, MC 228–77 Pasadena, CA 91125 (e-mail: ).

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.

DOI

10.1257/aer.20131306

Volume

105

Issue

6

Pages

1711-1737

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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