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CESifo Working Paper Details

Coordinating Intergenerational Redistribution and the Repayment of Public Debt

Christoph March (Website), Robert K. von Weizsäcker (Website)

CESifo Working Paper No. 6075 (September 2016)

Primary CESifo Category: [1] Public Finance

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.

Keywords: government debt, intergenerational conflict, voting, experimental economics

JEL Classification:
[C920] Design of Experiments: Laboratory, Group Behavior
[D720] Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
[H230] Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
[H630] National Debt; Debt Management; Sovereign Debt

Additional CESifo Category:
[2] Public Choice

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