| This study seeks to explain variation in public debt accumulation across 19 OECD countries from 1960 to 1999. Chapter 1 develops a model in which debt accumulation is due to coordination failure between budgetary decision-makers. This coordination failure produces an 'asymmetric response function' in which fiscal policy is loosened in good economic times, but is not tightened in bad times. This dynamic leads to debt accumulation. However, as debt increases, loss averse voters become increasingly fiscally conservative, and no longer oppose fiscal tightening, making debt reduction more likely. Strongly supportive empirical results are obtained for these predictions.; Chapter 2 extends this model, and investigates the effect of political and fiscal institutions on the ability of budgetary decision-makers to coordinate. The prediction is that institutions, such as coalition government and divided government, that fragment decision-making among agents with different policy preferences will hinder coordination between decision-makers, leading to a larger asymmetric response. Conversely, budgetary centralization is predicted to reduce the coordination problem, thereby reducing the size of the asymmetric response. The empirical results confirm these predictions.; Chapter 3 introduces new elements to the model. It incorporates competing political parties and electoral uncertainty. The argument is that structural features of the political system will affect the incentives and ability that each incumbent has to tolerate debt accumulation due to the above coordination failure. In particular, high levels of political competition (a measure of how incumbency is shared between parties) and parliamentary basis (the size of the incumbent coalition) reduce the tolerance of each incumbent for debt accumulation. Further, the existence of divided government reduces the ability of each incumbent to accumulate debt. These predictions receive strong support in the data.; These results provide insight into variation in debt accumulation, and challenge central elements of the conventional wisdom. The key lesson from this analysis is that there is no straightforward ordering of institutions in terms of fiscal outcomes, because different fiscal and political institutions have a comparative advantage in resolving different coordination problems. Institutions that worsen the asymmetric response function, for example, often enhance coordination between competing parties. |
