Abstract
In controlled laboratory experiments with and without overlapping generations, we study the role of intergenerational altruism in public debt accumulation. Public debt is chosen by popular vote, pays for public goods, and is repaid with general taxes. We use an optimal control model to derive a theoretical benchmark. With a single generation, public debt is accumulated prudently. With multiple and over-lapping generations, the burden of debt and the risk of over-indebtedness are shifted to future generations. We find a weak but significant sign of intergenerational altruism, observing that the revealed debt preferences increase as the number of following generations decreases. However, we find considerably fewer intergenerational fairness concerns than one would expect on the basis of the behavioral and experimental literature. Instead, political debt cycles that vary with voters’ age emerge. Debt ceiling mechanisms fail to encourage intergenerational altruism and do not mitigate the problem of burden shifting.
Highlights
Public debt, its accruement, its impact on the economic performance of states, and the question of how over-indebtedness can be successfully avoided are problems that have seized top places on the agenda of economic research for decades
If we look at public debt from the perspective of individual citizens who vote on taxes and indebtedness, choosing the level of public debt accumulation offers an instrument to adjust the burden of public good provision between current and future generations
We find that under experimental conditions the main driving force behind the public debt is the intergenerational transmission of the tax burden
Summary
Its accruement, its impact on the economic performance of states, and the question of how over-indebtedness can be successfully avoided are problems that have seized top places on the agenda of economic research for decades. Starting with [1] and [2], the indebtedness of states is modeled as an interplay between a benevolent rational planner, who tries to maximize the welfare of a representative individual with an infinite time horizon, and strictly rational citizens, who adapt their inheritance behavior in order to ensure that their children are able to pay the higher future tax that follows an increase of the public debt. This rather optimistic normative theory does not, fit very well with the empirical observations.
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