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We observe that the level of [d.sub.1] is irrelevant for the utility of a politician who violates a GDTC. His/her expected utility from choosing [d.sup.1] = [d.sup.c.sub.k1] is
(22.) As a tie-breaking rule, we assume that an indifferent politician will decide to run for office, shift output to the second period if it is critical for reelection, and honor the GDTC he/she has offered.
To limit the incumbents' tendency to push public debt beyond socially desirable levels, we allow candidates for public office to voluntarily offer GDTCs. Such contracts contain an upper limit for government debt, which must be maintained by the candidate if he/she is elected to public office.
We show that candidates offer GDTCs with balanced budgets.
The particular feature of GDTCs is that they may be violated by office holders in special circumstances, and that, in such cases, a violation is desirable from the electorate's perspective.
In Section IV we introduce GDTCs and derive the resulting equilibrium.
(i) There exists a unique equilibrium in which both candidates for office offer GDTCs with [[??].sup.c.sub.k1] = 0, k = 1, 2.
Proposition 4 shows that candidates for office offer the optimal debt level [d.sup.s.sub.1] in their GDTCs and will choose it if they are elected.
GDTCs correct the three inefficiencies of standard elections as follows.
We also note that total investments in the public good ([K.sub.1] + [K.sub.2] = 2[bar.[tau]]y) are the same in the first-best solution, and in elections with and without GDTCs. This is a consequence of the
We assume that GDTCs cannot be conditioned on macroeconomic shocks.
(1) Both candidates offer GDTCs with [[??].sup.c.sub.k1] = 0, k = 1, 2.
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