This paper studies politicians who have a present-bias for spending: they want to increase current spending and procrastinate spending cuts. We argue that legislators’ bias is more severe in economies with low institutional quality. We show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend. Depending on the environment, legislators’ decisions to be socially responsible may either complement or substitute other legislator’s decisions. In economies with weak institutions, politicians’ actions are strategic complements. Thus, institutional changes that induce scal responsibility are desirable, they generate a positive responsibility multiplier and reduce inefficient spending. However, in economies with better institutions, the same institutional change would induce some legislators to free ride on others’ responsibility and may lead to more inefficient spending. Joint with Alessandro Riboni.

Link to the paper: http://goo.gl/7V8loL