DP7860 Debt-sensitive Majority Rules

Author(s):	Johannes Gerd Becker, Hans Gersbach, Oliver Grimm
Publication Date:	June 2010
Keyword(s):	debt restriction, debt-sensitive majority rule, fiscal policy, public debt, public goods, simple majority rule, voting
JEL(s):	D72, E61, H41, H63
Programme Areas:	Public Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7860

We examine debt-sensitive majority rules. According to such a rule, the higher a planned public debt, the higher the parliamentary majority required to approve it. In a two-period model we compare debt-sensitive majority rules with the simple majority rule when individuals differ regarding their benefits from public-good provision. We establish the existence of Condorcet winners under debt-sensitive majority rules and derive their properties. We find that equilibrium debt-levels are lower under the debt-sensitive majority rule if preferences regarding public goods are sufficiently heterogeneous and if the impact of debt on future public-good provision is sufficiently strong. We illustrate how debt-sensitive majority rules act as political stabilizers in the event of negative macroeconomic shocks.