Collaborative Research: The Interplay between Debts and Entitlements

Georgetown University, Washington DC

Investigators

Abstract

Governments at all levels make decisions about spending that have long-term effects. For example, governments committed to large pension payments may have difficulty in meeting debt obligations. The results can be serious: for example, in the United States cities such as San Bernardino and Detroit have defaulted on their debts. Understanding the interplay between the incentive to accumulate debt and to promise entitlements is of crucial importance for understanding these actual and possible future episodes. In this project, the investigators use economic theory to analyze the political determinants of debt and entitlements and the relationship between these two components of governmental, fiscal obligations. Despite a large literature on the political economy of debt and many papers on pensions, there is almost no work that studies the political economy of the interaction between debt and entitlements. This project aims at developing a new framework to fill this important gap. This research contrasts debt and entitlements in resource allocations: debt transfers resources across periods, whereas entitlements directly target the future allocation of resources. The investigators introduce the study of entitlements into a dynamic political economy models, and analyze the impact of entitlements on debt. The research also examines how the levels of debt and entitlements change as the persistence of political power changes, or as the political system becomes more unstable. The project further investigates the determinants and the consequences of the joint growth in government debt and entitlements since the 1970s. Moreover, this research develops a novel way to evaluate fiscal rules that constrain the growth of debt and entitlements.