6. Corruption and Public Debt

See the online appendix to Reinhart and Rogoff (2012) for a times series of Italian debt ratios.

See Vannucci (2009) and the more popular accounts in Jones (2005) and Emmott (2012).

See the Italy Corruption Index 1995–2015 on the Transparency International website.

See Vannucci (2009).

We also assumed this form of altruism as part of the sensitivity analysis of the model with no government borrowing from Chap. 5 (see Ivanyna et al. 2016 for the details). There, introducing altruism did not affect the main results.

This type of specification is based on Becker and Tomes (1976) that gave rise to a vast literature on the economics of fertility where parents choose between the quantity and quality of children (see Galor (2005) for a survey). The quality of children is measured by the children’s adult wage, or the marginal product of labor, similar to our specification that uses the average product of labor of future generations. For the Cobb-Douglas production function we use, the marginal product of labor is proportional to the average product of labor and thus the two specifications are essentially equivalent. Thus, our assumption that households care about the future state of the economy is behaviorally-equivalent to an assumption of intergenerational altruism of the form, lnc _1t  + β ln c _2t + 1 + βγ ln w _t + 1.

As is well known, assuming Becker-Barro altruism, where the utility of future generations enter the utility function of the current generation, eliminates any effect on the economy from debt accumulation per se. The Ricardian Equivalence theorem that Becker-Barro altruism produces is difficult to reject in macroeconomic data, due to the absence of sufficiently powerful tests (Cardia 1997), but is clearly inconsistent with microeconomic studies that show (i) excessive sensitivity of consumption to temporary changes in income (see Johnson et al. (2006) and the references therein) and (ii) consumption effects from the redistribution of resources across generations, even in households that make intergenerational transfers (Altonji et al. 1992, 1997). See also the criticisms of Becker-Barro altruism in Kotlikoff (2003, Chap. 7).

This may be a more reasonable assumption in a democracy than in a dictatorship, and this is one reason that our analysis may be more relevant for developed economies with relatively strong democracies that have some capability of screening out corrupt types.

For tractability, some features of the government must be taken as given in our analysis. However, we eventually discuss how changes in exogenous features of the government affect the results. In addition, note that when η = 1, the households are indifferent about working in the public or private sectors. However, this is not necessarily true after we introduce corruption and evasion. In the presence of corruption and evasion, we find that public officials are better off than private households as along as η ≥ 1 (even though we assume that public officials cannot avoid taxes on their official salaries). Thus, everyone would want a government job.

Unlike with private capital, both private and public households use, and thus “crowd,” the public infrastructure.

For an introduction to endogenous periodic equilibria, see Azariadis (1993, Chaps. 8 and 9).

See also footnote 8.

For recent discussion and analysis of the golden rule of public finance see Brauninger (2005), Buiter (2000), Ghosh and Mourmouras (2004), Greiner and Semmler (2000), and Yakita (2008).