Discussion paper

DP5866 A Common Pool Theory of Deficit Bias Correction

The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible.


Wyplosz, C and S Krogstrup (2006), ‘DP5866 A Common Pool Theory of Deficit Bias Correction‘, CEPR Discussion Paper No. 5866. CEPR Press, Paris & London. https://cepr.org/publications/dp5866