The Composition of Government Expenditure in an Overlapping Generations Model

John Creedy, Shuyun May Li and Solmaz Moslehi ()

No 1043, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.

Keywords: Overlapping; Generations; Equilibrium; Growth; Median; Voter; Optimal; Expenditure; Public; Goods; Pensions (search for similar items in EconPapers)
JEL-codes: D72 H11 H41 H53 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Composition of Government Expenditure in an Overlapping Generations Model (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1043

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