A Dynamic Politico-Economic Model of Intergenerational contracts

Francesco Lancia and Alessia Russo

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper proposes a dynamic politico-economic theory of intergenerational contracts, whose driving force is the intergenerational confict over government spending. Embedding a repeated probabilistic voting setup in a standard OLG model with human capital accumulation, we find that the empowerment of elderly constituencies is key in order to enforce productive policies. The paper characterizes the Markov-perfect equilibrium of the voting game, as well as the welfare properties. The main results are: (i) the existence of a Markov-perfect equilibrium which attains a growth- enhancing intergenerational contract does not require pre-commitment through the establishment of long-lasting institutions; (ii) the political sustainability of the intergenerational contract relies solely on the politico-economic fundamentals that are payoff-relevant for future constituents; (iii) the implementation of pork-barrel transfers does not necessarily crowd out productive public investment; and, (iv) the greater the degree of intergenerational con?icts over the government spending, the lower the ineffciency.

JEL-codes: D72 E62 H23 H30 H53 (search for similar items in EconPapers)
Date: 2013-03
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: A Dynamic Politico-Economic Model of Intergenerational Contracts (2011)
Working Paper: A Dynamic Politico-Economic Model of Intergenerational Contracts (2010)
Working Paper: A Dynamic Politico-Economic Model of Intergenerational Contracts (2010)
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