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on Contract Theory and Applications |
| By: | Tobias Bergmann (PIK Potsdam, Technical University Berlin); Nikolaj Moretti (PIK Potsdam, University of Potsdam, CEPA) |
| Abstract: | We develop a simple two-period principal-agent model in which a present-biased government, the agent, chooses public investment levels given a deficit rule imposed by the principal. The principal sets a deficit cap to curb current debt-financed consumption. In doing so, it also reduces long-term government investment. We characterize the optimal deficit rule that balances these opposing effects. Our analysis yields three key insights. First, a deficit rule is always a second-best instrument resulting in nonzero deficits and inefficiently low public investment. Second, while identifying the optimal deficit rule is challenging in practice, we demonstrate that under general conditions, shocks to the productivity of public investment entail an increase in the optimal deficit cap. Third, we compare the welfare effects of three fiscal rules: a balanced budget rule, the absence of any deficit rule, and a benchmark deficit rule. The benchmark deficit rule limits the agent’s deficit to the level incurred by an agent without present bias. For moderate levels of present bias, the absence of a deficit rule leads to higher welfare than the balanced budget rule. The absence of a rule is consistently welfare-dominated by the benchmark deficit rule. Only in cases of substantial present bias does the balanced budget rule result in higher welfare than the benchmark deficit rule. |
| Keywords: | public debt, fiscal rules, present bias, principal-agent, public investment |
| JEL: | D82 E62 H30 H63 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:pot:cepadp:85 |
| By: | Christopher P. Chambers; Yusufcan Masatlioglu; Christopher Turansick |
| Abstract: | People are influenced by their peers when making decisions. In this paper, we study the linear-in-means model which is the standard empirical model of peer effects. As data on the underlying social network is often difficult to come by, we focus on data that only captures an agent's choices. Under exogenous agent participation variation, we study two questions. We first develop a revealed preference style test for the linear-in-means model. We then study the identification properties of the linear-in-means model. With sufficient participation variation, we show how an analyst is able to recover the underlying network structure and social influence parameters from choice data. Our identification result holds when we allow the social network to vary across contexts. To recover predictive power, we consider a refinement which allows us to extrapolate the underlying network structure across groups and provide a test of this version of the model. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.02609 |