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We suggest a probabilistic voting model where voters' preferences for alternative public goods display habit formation. Current policies determine habit levels and in turn the future preferences of the voters. This allows the incumbent to act strategically in order to influence the probability of re-election. Comparing to a benchmark case of a certain re-election, we demonstrate that the incumbent's optimal policy features both a more polarized allocation between the alternative public goods and a debt bias.

Should the government run fiscal deficits in response to an adverse external shock that warrants transfer of resources from production of non-traded to traded goods? This paper considers normative fiscal policy implications of sectoral adjustment costs in a two-sector model with overlapping generations. Fiscal deficits benefit present generations by depleting foreign assets and slowing down the adjustment process. We show that despite no nominal rigidities, temporary fiscal deficits increase social welfare if adjustment costs prevent immediate sectoral reallocation of inputs. If there are no adjustment costs, the case for fiscal deficits vanishes.

Particularly high saving rates among the elderly in both rural and urban China call for an investigation of the involved bequest motive. Utilizing unique survey data from a diverse group of Chinese households, we document that the magnitude of the bequest from parent to child is associated with the level of personal assistance from child to parent. Moreover, we find indicative evidence that both bequest and assistance are increasing in the parent's income and decreasing in the child's income. Comparing with the predictions from a stylized intergenerational model, these findings are consistent with an exchange‐based bequest motive. Our findings have potential implications for how public policies and transfer schemes should be designed in order to contribute to the Chinese government objective of increased private consumption. Our results are conditional on the inclusion of housing wealth as part of the bequest, which indicates that transfer of housing is key to understanding the intergenerational assistance and bequest motives, and subsequently the high saving levels among the elderly in China.