The two sides of public debt: Intergenerational altruism and burden shifting

Abstract

In controlled laboratory experiments with and without overlapping generations, we study the role of intergenerational altruism in public debt accumulation. Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes. We use an optimal control model to derive a theoretical benchmark. With a single generation, public debt is accumulated prudently. With multiple and over-lapping generations, the burden of debt and the risk of over-indebtedness are shifted to future generations. We find a weak but significant sign of intergenerational altruism, observing that the revealed debt preferences increase as the number of following generations decreases. However, we find considerably fewer intergenerational fairness concerns than one would expect on the basis of the behavioral and experimental literature. Instead, political debt cycles that vary with voters’ age emerge. Debt ceiling mechanisms fail to encourage intergenerational altruism and do not mitigate the problem of burden shifting.

Motivational Factors in Intergenerational Sustainability Dilemma: A Post-Interview Analysis

“…Sherstyuk et al [18] examine the efficiency of dynamic externalities, showing that resolving the dynamic externalities is less challenging in infinitely lived decision-maker settings than in intergenerational ones. Fochmann et al [19] study the role of intergenerational altruism to solve IS problem i.e., accumulation of public debt, indicating that fairness concern for the future generation can not maintain IS. These studies find that, in general, IS problems are complicated and difficult to resolve with a simple intervention such as intergenerational altruism.…”

Coordinating intergenerational redistribution and the repayment of public debt: an experimental test of Tabellini (1991)

“…It is not clear, for example, how a binding vote on debt repudiation could be organized in practice. 1 Experiments have the potential to overcome some of these issues and to stimulate future empirical studies (see also Sutter 2003;Fochmann et al 2018;Battaglini et al 2019).…”

“…Accordingly, the accumulation of debt is an end and not a strategic vehicle. Relatedly, Fochmann et al (2018) investigate experimentally how intergenerational altruism affects public debt accumulation, i.e. shifting a financial burden to future generations.…”

“…Finally, in an overlapping-generations-model with more than two periods, children could pass on the burden of public debt to future generations (see e.g. Fochmann et al 2018). This could make them less opposed to supporting the bond investments of the old.…”

“…Finally, we focus on a static snippet of an inherently dynamic environment. Overlapping generations models often allow for more complex dynamic equilibria (Marimon et al 1993;Offerman et al 2001), and they enable the burden of government debt to be shifted from one generation to the next (Fochmann et al 2018). Still, as there are usually multiple equilibria in such dynamic settings, coordination will likely play an important role (see e.g.…”