Working Paper

Coordinating Intergenerational Redistribution and the Repayment of Public Debt

Christoph March, Robert K. von Weizsäcker
CESifo, Munich, 2016

CESifo Working Paper No. 6075

Is there a link between public debt and wealth inequality? Could government bondholders use intra-generational redistribution strategically to make the repayment of debt politically viable? Using a two-generations game-theoretic model, we identify coordination and divide-and-conquer as key factors. By coordinating their bond investments, the old generation may secure a majority favoring debt repayment. As a consequence, coordination mediates the impact of wealth inequality on public debt. Furthermore, ease of coordination offers another compelling reason why declining population growth fosters the accumulation of public debt. We test our model in a laboratory experiment and confirm the central predictions.

CESifo Category
Public Finance
Public Choice
Keywords: government debt, intergenerational conflict, voting, experimental economics
JEL Classification: H230, H630, D720, C920