Long-Term Economic Implications of Demeny Voting: A Theoretical Analysis

By Luigi Bonatti and Lorenza Alexandra Lorenzetti

http://d.repec.org/n?u=RePEc:ces:ceswps:_10039&r=dge

This paper places itself at the intersection between the literature on “Demeny voting” (the proposal of letting custodial parents exercise their children’s voting rights until they come of age) and the vast literature on formal models with endogenous fertility that address the problem of fiscal redistribution between young and old cohorts in the presence of an aging population. Linking these issues to the process of economic growth through a simple overlapping generations model, we show that, even if the government is myopic, in the sense that it cares only about the current well being of the living (and voting) generations, an increase in the relative importance that it attaches to the interests of the young cohort (for instance, due the introduction of Demeny voting) leads in the long run to a higher population growth rate and raises the consumption level of each young adult, the capital stock per worker and the output per adult. We also show that in the long run such a reform raises the well being that individuals can expect at birth to achieve during their lifetime.

Today I learned about Demeny voting. It interesting to see that fertility not only increases because the benefits from having children improve, but also because having more children gives more voting power. I wonder how this would pan out if the model would include some benefits go to parents without improving the well-being on children, that is, we could get a situation where children are pawns to political game.

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Optimal GDP-indexed Bonds

By Yasin Kürsat Önder

http://d.repec.org/n?u=RePEc:rug:rugwps:22/1056&r=dge

I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government’s debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets.

This is not the first paper on this kind of bond that I mention on the blog. Visibly, we are dealing with market incompleteness and people are suggesting particular assets to complete the market. Here, one asset is proposed that has characteristics that make it resemble more a stock share than a bond: highly variable dividends that depend on how an underlying asset (the national economy) performs. Under some metric, this asset is optimal, but can it really complete the market? That is unlikely. For this to happen you would need a menu of different assets that would be individually priced on a competitive market. We are still far from that. But if the constraint is that you can only have one asset, then this paper shows how it would look like.

Crisis Propagation in a Heterogeneous Self-Reflexive DSGE Model

By Federico Guglielmo Morelli, Michael Benzaquen, Jean-Philippe Bouchaud and Marco Tarzia

http://d.repec.org/n?u=RePEc:hal:journl:hal-03378921&r=dge

We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.

If you also wondered what a self-reflexive DSGE model is, here is the lowdown. This is a mixture of HANK (Heterogeneous Agent New-Keynesian) models and ABM (Agent-Based Model). You have the general equilibrium, the heterogeneity and the dynamics of HANK, but some aspects of heterogeneity are fixed (say, skills, earnings, market structure) but new dimensions are added, such as social interaction. A household’s consumption preferences may be determined by the consumption of its neighbors. This is not quite like the habit formation models (or “catch-up-with-the-Joneses”), where the reference is aggregate consumption, here a network with local interactions is built. Of course, things are going to depend on how the network is set up, and for this particular paper, how rich and poor interact. Potentially crucially, these interactions do not change as the economy slides into a crisis. Also, the parameterization of the network appears to be impossible, thus results are provided for all possible values, showing that almost anything is possible. One would need to narrow this down to give some valuable conclusions.