Constitutional “Rules” and Intergenerational Fiscal Policy

This paper analyzes the impact of alternative political institutions on sustainable fiscal policies. We study the choice of intergenerational transfers as outcomes of an infinite social security game among successive selfish median voters. Majoritarian systems accord the current median voter maximum fiscal discretion but no direct influence over future policy. This political arrangement sustains, among others, dynamically inefficient transfers and volatile, non-stationary sequences. Constitutional “rules” award to the minorities veto power over fiscal policy changes proposed by the majority. This unanimity provision is equivalent to partial precommitment. Under constitutional “rules,” sustainable fiscal policies feature Pareto efficient, non decreasing transfer sequences.