Debts and deficits with fragmented fiscal policymaking

Abstract

This paper develops a political-economic model of fiscal policy — one in which government resources are a ‘common property’ out of which interest groups can finance expenditures on their preferred items. This setup has striking macroeconomic implications. Transfers are higher than a benevolent planner would choose them to be; fiscal deficits emerge even when there are no reasons for intertemporal smoothing, and in the long run government debt tends to be excessively high; peculiar time profiles for transfers can emerge, with high net transfers early on giving rise to high taxes later on.

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