The Political Economy of Growth, Inequality, the Size and Composition of Government Spending

Klaus Schmidt-Hebbel and José-Carlos Tello (jctello@pucp.edu.pe)

No 19, Working Papers from Peruvian Economic Association

Abstract: This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is reflected by a discrete distribution of infinitely-lived agents that differ by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result – that inequality and growth could be negatively or positively related – could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent.

Keywords: inequality; endogenous growth; multidimensional voting; endogenous taxation (search for similar items in EconPapers)
JEL-codes: D72 E62 H11 H31 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-cdm, nep-dge, nep-fdg, nep-gro, nep-mac, nep-pbe and nep-pol
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Related works:
Working Paper: The Political Economy of Growth, Inequality, the Size and Composition of Government Spending (2014)
Working Paper: The Political Economy of Growth, Inequality, the Size and Composition of Government Spending (2014)
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