Public Debt and the Political Economy of Reforms

How do electoral incentives influence the choice to experiment with a policy reform that generates uncertain future benefits? To answer this question, , we examine a two-period model of redistributive politics with uncertain policy outcomes involving a mixture of private and public benefits. . In equilibrium, , we find that the intertemporal trade-off between current policy costs and future benefits creates an incentive for politicians to use public debt to smooth spending across periods. . The higher the share of policy benefits that are in the form of a public good, , the higher the level of available debt-related spending on targeted policies that is necessary. . ( JEL D63, D72, E23, H41, H63)