International Coordination of Debt Rules with Time-inconsistent Voters

In this study, we investigate the international coordination of debt rules in an economy consisting of a large number of countries with varying degrees of present bias. A case whereby each country sets its own uncoordinated debt rules is compared with a case whereby all countries have common coordinated debt rules. Countries with weak present-biased preferences increase their debt issuance and suffer from welfare losses by participating in coordination. In contrast, countries with strong present-biased preferences reduce their debt issuance and can enjoy welfare improvement by participating in coordination. The contrasting results suggest the possibility that the former have little incentive to follow the coordinated rule.