DP9203 Economic and Politico-Economic Equivalence

Author(s):	Martin Gonzalez-Eiras, Dirk Niepelt
Publication Date:	November 2012
Keyword(s):	equivalence, government debt, politico-economic equilibrium, social security reform, tax policy
JEL(s):	E62, H55, H63
Programme Areas:	International Macroeconomics, Public Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=9203

We extend "economic equivalence" results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are "politico-economically equivalent" to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. The equivalence conditions help to identify factors that render institutional change non-neutral. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.