Public Debt and the Birth of the Democratic State: France and Great Britain, 1688-1789

By David Stasavage | Go to book overview

2
A Model of Credible Commitment
under Representative Government

1. Introduction

In the first chapter I presented three arguments about the credibilityenhancing effects of constitutional checks and balances, political parties, and bureaucratic delegation. This chapter derives and develops each of these arguments more formally, using a game-theoretic model of bargaining among legislators. I construct a simple model where legislators must set taxes on land and capital in order to meet an exogenous budget constraint. Partisan preferences are included explicitly by allowing legislators to represent districts that derive variable amounts of income from land and from capital. This division fits an eighteenth-century political context. This political model of capital taxation, which is adapted from Persson and Tabellini (1994), can also be applied to the politics of public debt, because a default on debt represents a one-off tax on owners of this type of capital (government bonds).

A primary implication of the model is that landowning majorities can face a credibility problem. Once owners of capital have made investment decisions (such as purchasing government debt), a landowning majority will have an ex post facto incentive to raise all revenues from income on capital. Anticipating this outcome, capital owners will fail to invest, and in equilibrium, all groups will be worse off compared with a situation where the majority could commit to a moderate tax rate on capital. I next show that if legislators also bargain over a second issue dimension, such as the degree of religious toleration, and if landowner preferences are split over this issue, then more liberally minded landowners may moderate their demands with respect to taxation in order to acquire support of capitalists on the issue of religious toleration. As a result, in cases where legislators bargain over multiple issues, credible commitment can emerge

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