Government Policy with Time Inconsistent Voters | Zendy

Alberto Bisin | Zendy; Alessandro Lizzeri | Zendy; Leeat Yariv | Zendy

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Government Policy with Time Inconsistent Voters

Author(s) -

Alberto Bisin,

Alessandro Lizzeri,

Leeat Yariv

Publication year - 2015

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20131306

Subject(s) - economics , commit , dynamic inconsistency , debt , government debt , portfolio , paternalism , government (linguistics) , welfare , public choice , fiscal policy , undo , monetary economics , public economics , public finance , control (management) , microeconomics , macroeconomics , finance , market economy , linguistics , philosophy , database , politics , computer science , political science , law , management , operating system

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)

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