Future rent-seeking and current public savings
The conventional wisdom is that politicians' rent-seeking motives increase public debt and deficits. This is because myopic politicians face political risk and prefer to extract political rents as early as possible. In this paper we study the determination of government debt and deficits in a d...
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| Format: | Article |
| Language: | en_US |
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Elsevier
2017
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| Online Access: | http://hdl.handle.net/1721.1/108289 https://orcid.org/0000-0003-2760-451X |
| _version_ | 1826210413572784128 |
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| author | Caballero, Ricardo J Yared, Pierre |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Caballero, Ricardo J Yared, Pierre |
| author_sort | Caballero, Ricardo J |
| collection | MIT |
| description | The conventional wisdom is that politicians' rent-seeking motives increase public debt and deficits. This is because myopic politicians face political risk and prefer to extract political rents as early as possible. In this paper we study the determination of government debt and deficits in a dynamic political economy model. We show that this conventional wisdom relies on economic volatility being low relative to political uncertainty. If economic volatility is high relative to political uncertainty, then a rent-seeking government actually over-saves and over-taxes along the equilibrium path relative to a benevolent government. This result emerges because of the option value of rent-seeking: a rent-seeking government over-values future funds because of the possibility of using them for future rents instead of cutting taxes in the event of a future boom (when marginal utility of private consumption is low). This over-saving bias is temporary since, in the long run, the rent-seeking government over-borrows relative to the benevolent government as it eventually squanders the funds it has accumulated. We find that both the under-saving and over-saving bias of the government can be solved by a rule of capping deficits. |
| first_indexed | 2024-09-23T14:49:30Z |
| format | Article |
| id | mit-1721.1/108289 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T14:49:30Z |
| publishDate | 2017 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | mit-1721.1/1082892022-09-29T10:47:56Z Future rent-seeking and current public savings Caballero, Ricardo J Yared, Pierre Massachusetts Institute of Technology. Department of Economics Caballero, Ricardo Caballero, Ricardo J Yared, Pierre The conventional wisdom is that politicians' rent-seeking motives increase public debt and deficits. This is because myopic politicians face political risk and prefer to extract political rents as early as possible. In this paper we study the determination of government debt and deficits in a dynamic political economy model. We show that this conventional wisdom relies on economic volatility being low relative to political uncertainty. If economic volatility is high relative to political uncertainty, then a rent-seeking government actually over-saves and over-taxes along the equilibrium path relative to a benevolent government. This result emerges because of the option value of rent-seeking: a rent-seeking government over-values future funds because of the possibility of using them for future rents instead of cutting taxes in the event of a future boom (when marginal utility of private consumption is low). This over-saving bias is temporary since, in the long run, the rent-seeking government over-borrows relative to the benevolent government as it eventually squanders the funds it has accumulated. We find that both the under-saving and over-saving bias of the government can be solved by a rule of capping deficits. National Science Foundation (U.S.) 2017-04-20T15:28:28Z 2017-04-20T15:28:28Z 2010-08 2010-04 Article http://purl.org/eprint/type/JournalArticle 0022-1996 http://hdl.handle.net/1721.1/108289 Caballero, Ricardo J. and Yared, Pierre. “Future Rent-Seeking and Current Public Savings.” Journal of International Economics 82, no. 2 (November 2010): 124–136. © 2010 Elsevier B.V. https://orcid.org/0000-0003-2760-451X en_US http://dx.doi.org/10.1016/j.jinteco.2010.08.004 Journal of International Economics Creative Commons Attribution-NonCommercial-NoDerivs License http://creativecommons.org/licenses/by-nc-nd/4.0/ application/pdf Elsevier Prof. Townsend via Kate McNeill |
| spellingShingle | Caballero, Ricardo J Yared, Pierre Future rent-seeking and current public savings |
| title | Future rent-seeking and current public savings |
| title_full | Future rent-seeking and current public savings |
| title_fullStr | Future rent-seeking and current public savings |
| title_full_unstemmed | Future rent-seeking and current public savings |
| title_short | Future rent-seeking and current public savings |
| title_sort | future rent seeking and current public savings |
| url | http://hdl.handle.net/1721.1/108289 https://orcid.org/0000-0003-2760-451X |
| work_keys_str_mv | AT caballeroricardoj futurerentseekingandcurrentpublicsavings AT yaredpierre futurerentseekingandcurrentpublicsavings |