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The Survival of the Welfare State

John Hassler (), Jose Mora (), Kjetil Storesletten () and Fabrizio Zilibotti ()
Additional contact information
Jose Mora: Universitat Pompeu Fabra, Postal: Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, SPAIN

No 704, Seminar Papers from Stockholm University, Institute for International Economic Studies

Abstract: This paper provides an analytical characterization of Markov perfect equilibria in a politico-economic model with repeated voting, where agents vote over distortionary income redistribution. The key feature of the theory is that the future constituency of redistributive policies depends positively on the current level of redistribution, since this affects both private investments and the future distribution of voters. Agents vote rationally and fully anticipate the effects of their political choice on both private incentives and future voting outcomes. The model features multiple equilibria. In "pro-welfare" equilibria, both welfare state policies and their effects on distribution persist forever. In "anti-welfare equilibria", even a majority of beneficiaries of redistributive policies vote strategically so as to induce the formation of a future majority that will vote for zero redistribution.

Keywords: repeated voting; Markov equilibrium; multiple equilibria; welfare state; redistribution; political economy; policy persistence; wage inequality; education (search for similar items in EconPapers)
JEL-codes: D72 E62 H11 H31 P16 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2002-02-12
New Economics Papers: this item is included in nep-dge and nep-pbe
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Published in American Economic Review, 2003, pages 87-112.

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