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Working Paper
Preventing Controversial Catastrophes
In a market-based democracy, we model different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies ...
Working Paper
Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation
We study the impact of public debt limits on economic growth exploiting the introduction of a Mexican law capping the debt of subnational governments. Despite larger fiscal consolidation, states with higher ex-ante public debt grew substantially faster after the law, albeit at the expense of increased extreme poverty. Credit registry data suggests that the mechanism behind this result is a reduction in crowding out. After the law, banks operating in more indebted states reallocate credit away from local governments and into private firms. The unwinding of crowding out is stronger for riskier ...