The Political Economy of Public Debt: A Laboratory Study
This paper reports the results from a laboratory experiment designed to study political distortions in the accumulation of public debt. A legislature bargains over the levels of a public good and of district specific transfers in two periods. The legislature can issue or purchase risk-free bonds in the first period and the level of public debt creates a dynamic linkage across policymaking periods. In line with the theoretical predictions, we find that public policies are inefficient and efficiency is increasing in the size of the majority requirement, with higher investment in public goods and lower debt associated with larger majority requirements. Also in line with the theory, we find that debt is lower when the probability of a negative shock to the economy in the second period is higher, evidence that debt is used to smooth consumption.
Nunnari acknowledges financial support from the European Research Council (grant No. 648833). Palfrey acknowledges financial support from the National Science Foundation (SES-1426560), the Gordon and Betty Moore Foundation (SES-1158), and the Russell Sage Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Marco Battaglini, 2011. "The Political Economy of Public Debt," Annual Review of Economics, vol 3(1), pages 161-189.
Marco Battaglini & Salvatore Nunnari & Thomas R Palfrey, 2020. "The Political Economy of Public Debt: A Laboratory Study," Journal of the European Economic Association, vol 18(4), pages 1969-2012.