Debt as a means of mitigating the common-pool problem. (Chari and Cole, 1993.) Consider the same setup as in Problem 12.15. Suppose, however, that there is an initial level of debt, D. The government budget constraint is therefore 
(a) How does an increase in D affect the Nash equilibrium level of G?
(b) Explain intuitively why your results in part (a) and in Problem 12.15 suggest that in a two-period model in which the representatives choose D after the first-period value of G is determined, the representatives would choose D > 0.
(c) Do you think that in a two-period model where the representatives choose D before the first-period value of G is determined, the representatives would choose D > 0? Explain intuitively.
Step by step
Solved in 4 steps
