Public debt and the political economy of reforms

How do electoral incentives influence the decision to trial a policy reform whose future benefits are uncertain? To answer this question, the authors examine a two-period model of redistributive policy, the outcomes of which are uncertain and involve a mix of private and public benefits. At equilibrium, the authors find that the time trade-off between the policy’s current costs and its future benefits incentivises policymakers to resort to public debt to smooth expenditure across periods. The higher the proportion of the policy’s benefits that take the form of a public good, the higher the level of debt-financed expenditure available for targeted policies.