Staff Report 163

Why Are Representative Democracies Fiscally Irresponsible?

V. V. Chari | University of Minnesota, Federal Reserve Bank of Minneapolis
Harold L. Cole

Published August 1, 1993

We develop a model of a representative democracy in which a legislature makes collective decisions about local public goods expenditures and how they are financed. In our model of the political process legislators defer to spending requests of individual representatives, particularly committee chairmen, who tend to promote spending requests that benefit their own districts. Because legislators do not fully internalize the tax consequences of their individual spending proposals, there is a free rider problem, and as a result spending is excessively high. This leads legislators to prefer a higher level of debt to restrain excessive future spending.

Published In: Cuadernos Economicos (No. 62, 1996, pp. 169-78)

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