The Dynamics of Inequality and Social Security in General Equilibrium

Zheng Song ()

Review of Economic Dynamics, 2011, vol. 14, issue 4, 613-635

Abstract: This paper analyzes the dynamic politico-economic equilibrium of a model where repeated voting on social security and the evolution of household characteristics in general equilibrium are mutually affected over time. In particular, we incorporate within-cohort heterogeneity in a two-period Overlapping-Generation model to capture the intra-generational redistributive effect of social security transfers. Political decision-making is represented by a probabilistic voting à la Lindbeck and Weibull (1987). We analytically characterize the Markov perfect equilibrium, in which social security tax rates are shown to be increasing in wealth inequality. A dynamic interaction between inequality and social security leads to larger social security programs. In a model calibrated to the U.S. economy, the dynamic interaction is shown to be quantitatively important: It accounts for more than half of the social security growth in the dynamics. We also perform some normative analysis, showing that the politico-economic equilibrium outcomes can be fundamentally different from the Ramsey allocation. (Copyright: Elsevier)

Keywords: Inequality; Intra-generational redistribution; Markov perfect equilibrium; Probabilistic voting; Social security (search for similar items in EconPapers)
JEL-codes: E21 E62 H21 H55 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (42)

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DOI: 10.1016/j.red.2011.05.001

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