Transitional Dynamics in a Growth Model with Distributive Politics

Chetan Ghate

No 514, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper constructs a heterogenous agent model of endogenous distribution and growth. When the labor leisure choice of agents is exogenous, the factor holding ratios of households converges to a mass point that is independent of the initial distribution of capital in the steady state. There is complete equality and every household's preferred tax rate equals the growth maximizing tax rate. There is no distributive con.ict in the long run. When the labor leisure choice of households is endogenous, there is also complete convergence in the factor holding ratios of agents in the steady state. However, the tax rate under majority voting is less than the growth maximizing tax rate which leads to distributive con.ict in the long run. These results extend the model of endogenous distribution and growth in Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the e.ect of income inequality on the tax rate and labor supply. Second, the model is solved using a more empirically plausible speci.cation of the government budget constraint in which households vote over the tax rate on capital income instead of a tax on wealth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth is not an intractable proposition.

Keywords: Distributive conflict; Endogenous distribution; Median voter theorem; Endogenous growth (search for similar items in EconPapers)
JEL-codes: E62 O40 P16 (search for similar items in EconPapers)
Pages: 36 p.
Date: 2005
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Related works:
Working Paper: Transitional Dynamics in a Growth Model with Distributive Politics (2006)
Working Paper: Transitional dynamics in a growth model with distributive politics (2005)
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