Political Economy of Debt and Growth
We present a theory of endogenous fiscal policy and growth. Fiscal policy — debt, income tax, spending on local public goods and public investment — is determined through legislative bargaining. Economic growth depends directly on public investment and, via learning-by-doing, on labor supply. Our model provides a mapping between underlying inefficiencies in the decisions over fiscal policy and the long run economic outcomes. The model allows for welfare analysis of interventions designed to curb such inefficiencies.