The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy

Ryo Arawatari and Tetsuo Ono

No 09-38-Rev, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper introduces an overlapping-generations model with earnings hetero- geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen- erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.

Keywords: Borrowing constraint; Social security; Public goods provision; Ends- against-the-middle equilibrium; Wage inequality (search for similar items in EconPapers)
JEL-codes: D72 H41 H55 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2009-11, Revised 2010-08
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pol
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Related works:
Working Paper: The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:0938r

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