The Political Economy of Public Debt: A Laboratory Study

This paper reports the results from a laboratory experiment designed to study the role of
political distortions in the accumulation of public debt. In a legislature, representatives of each
of n districts bargain over the current period's endowment for investment in a public good and
transfers to each district. The legislature can issue or purchase risk-free bonds, and the level of
public debt creates a dynamic linkage across policy-making periods. We analyze the equilibrium
policies under different voting q-rules, where q is the number of votes required for passage. We
conduct a laboratory experiment with five-person committees that compares three alternative
voting rules: oligarchy (q = 2), simple majority (q = 3), and super majority (q = 4).  In line
with the theoretical predictions, we find that the efficiency of public policies is increasing in
q, with higher investment in the public good and lower levels of debt. Finally, we present
results for a second treatment, where we keep political institutions fixed and we manipulate
the economic conditions, namely, the risk of a shock to society.

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