The Political Economy of Public Debt: A Laboratory Study

51 Pages Posted: 18 Jul 2016 Last revised: 23 Mar 2022

See all articles by Marco Battaglini

Marco Battaglini

Cornell University

Salvatore Nunnari

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences

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Date Written: July 2016

Abstract

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.

Suggested Citation

Battaglini, Marco and Nunnari, Salvatore and Palfrey, Thomas R., The Political Economy of Public Debt: A Laboratory Study (July 2016). NBER Working Paper No. w22406, Available at SSRN: https://ssrn.com/abstract=2810916

Marco Battaglini (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Salvatore Nunnari

Bocconi University

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Via Roentgen 1
Milan, 20136
Italy

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
301A Baxter Hall
Pasadena, CA 91125
United States
626-395-4088 (Phone)
626-4432-1726 (Fax)

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