Government policy with time inconsistent voters

Alberto Bisin, Alessandro Lizzeri, Leeat Yariv

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)1711-1737
    Number of pages27
    JournalAmerican Economic Review
    Volume105
    Issue number6
    DOIs
    StatePublished - Jun 1 2015

    ASJC Scopus subject areas

    • Economics and Econometrics

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