Government Policy with Time Inconsistent Voters

Abstract

This paper presents an analysis of how economic policy responds to the political demands of agents with self-control problems. The main result is that collective action may generate an amplification of individual self-control problems leading to excessive government debt. The analysis also provides some cautionary discussion of commonly advocated policies (such as facilitating investment in illiquid assets) in a world where government debt responds to the portfolios of private individuals.An important and influential approach to government policy has grown out of the field of behavioral economics. A number of contributors to this area argue that some form of government policy interventions can be justified by "paternalistic attitudes" even in cases outside the realm of the textbook approach to public policy, i.e., even absent externalities, public goods, and asymmetric information. 1 Within behavioral economics, a substantial body of work discusses self-control problems and their consequences within a consumption-savings environment. Some argue that there are inefficiently low savings when individuals are left to their own devices (e.g., Camerer, Loewenstein, and Rabin 2003;Hurst 2003;and Madrian 2012). These insights have been used for justifying paternalistic interventions by governments aimed at 1 See, for instance, Camerer, Loewenstein, and Rabin

Age and Support for Public Debt Reduction

“…Sparing the complexities of the formal theoretical model, they predict that as the proportion of younger voters shrinks, fiscal policy will become more focused on contemporary public goods consumed by the elderly leading to increases in public debt. This model has been used as a framework for a variety of work on ageing fiscal policy (Bisin et al, 2015;Andersen et al, 2006;Magistretti, 2019), with some extensions suggesting that market discipline, via creditor demand for higher interest rates, will dampen the impact of aging on debt. However, this will likely come with additional social costs and increase pressure to default when it becomes more difficult to roll over existing debt, as debt ceilings are reached, creditors lose faith and credit ratings fall, and spending becomes constrained.…”

“…An aging, active voter population lends urgency to testing the intergenerational conflict assumption at the heart of prominent political economy models of debt (Cukierman and Meltzer, 1989;Tabellini, 1991;Song et al, 2012;Bisin et al, 2015;Yared, 2019) that are often used to advocate for controversial policies like fiscal rules that can limit a government's investment in society (Andersen, 2019;Acemoglu and Yared, 2010). While intergenerational conflict over debt is a widely used assumption in the debt literature, the assumption has not been widely tested.…”

Nudges for better voters

“…This finding parallels Buchanan's warning regarding taxation: "To the extent that the total tax load on an individual can be fragmented so that he confronts numerous small levies rather than a few significant ones, illusory effects may be created" (1967, p. 134). 8 See, however, Bisin, Lizzeri and Yariv (2015) for a model of public debt where voters have self-control problems and governments respond to individuals' desire to undo their commitments based on investments in illiquid assets. 9 This notice of public debt could also include some simplified metrics to measure other aspects of the overall state of government's fiscal health that are not represented by the current flows of revenues and expenditures and the magnitude of the public debt, such as so-called 'unfunded obligations.'…”

An Extended Survey on Time-Inconsistency and Its Applications

“…In terms of collective action problems, Bisin, Lizzeri, and Yariv (2015) show that collective action may cause individual self-control problems to increase leading to excessive government debt. When there is heterogeneity in time preferences of individuals, Jackson and Yariv (2015) show that every Pareto efficient and non-dictatorial method of aggregating utility functions must be time inconsistent.…”