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Government Policy with Time Inconsistent Voters

Bisin, Alberto and Lizzeri, Alessandro and Yariv, Leeat (2015) Government Policy with Time Inconsistent Voters. American Economic Review, 105 (6). pp. 1711-1737. ISSN 0002-8282.

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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.

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Additional Information:© 2015 American Economic Association. We thank Daron Acemoglu, Guido Lorenzoni, Wolfgang Pesendorfer, Nikita Roketskiy, Bernardo Silveira, and Michael Ting for very helpful discussions and feedback. We gratefully acknowledge financial support from the National Science Foundation and the Gordon and Betty Moore Foundation (through grant 1158). Bisin wishes to acknowledge the support of the Ministry of Education and Science of the Russian Federation, grant 14.U04.31.0002, administered through the NES CSDSI.
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Gordon and Betty Moore Foundation1158
Russian Federation Ministry of Education and Science14.U04.31.0002
Issue or Number:6
Classification Code:JEL: D2, D72, D78, H62, H63
Record Number:CaltechAUTHORS:20150731-133508361
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Official Citation:Bisin, Alberto, Alessandro Lizzeri, and Leeat Yariv. 2015. "Government Policy with Time Inconsistent Voters." American Economic Review, 105(6): 1711-37
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:59117
Deposited By: Tony Diaz
Deposited On:06 Aug 2015 18:50
Last Modified:03 Oct 2019 08:43

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