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The Dynamics of Inequality and Social Security in General Equilibrium

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  • Zheng Song

    (Fudan University)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2011.05.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 4 (October)
Pages: 613-635

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Handle: RePEc:red:issued:09-145

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Keywords: Inequality; Intra-generational redistribution; Markov perfect equilibrium; Probabilistic voting; Social security;

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Citations

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Cited by:
  1. Zheng Song & Kaiji Chen, 2009. "Markovian Social Security in Unequal Societies," 2009 Meeting Papers, Society for Economic Dynamics 318, Society for Economic Dynamics.
  2. Ryo Arawatari & Tetsuo Ono, 2008. "Aging, Inequality and Social Security," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 08-19, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Ryo Arawatari & Tetsuo Ono, 2008. "A Political Economy Model of Earnings Mobility and Redistribution Policy," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 08-18-Rev.4, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Oct 2012.
  4. Monisankar Bishnu & Min Wang, 2013. "The Political intergenerational welfare state: A Unified framework," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers, Indian Statistical Institute, New Delhi, India 13-08, Indian Statistical Institute, New Delhi, India.
  5. Tetsuo Ono, 2014. "Economic Growth and the Politics of Intergenerational Redistribution," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 14-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  6. Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2012. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8738, C.E.P.R. Discussion Papers.
  7. Kuhle, Wolfgang, 2012. "Dynamic efficiency and the two-part golden rule with heterogeneous agents," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 992-1006.
  8. Ryo Arawatari & Tetsuo Ono, 2011. "A Political Economy Theory of Government Debt and Social Security," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 11-33, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  9. Andreas Bachmann & Kaspar Wüthrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp1310, Universitaet Bern, Departement Volkswirtschaft.
  10. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 13-06-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Sep 2013.
  11. Bishnu, Monisankar & Wang, Min, 2014. "The Political Intergenerational Welfare State," Staff General Research Papers, Iowa State University, Department of Economics 37764, Iowa State University, Department of Economics.
  12. Tetsuo Ono, 2014. "Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 14-30, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  13. Hideki Konishi & Kozo Ueda, 2013. "Aging and Deflation from a Fiscal Perspective," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 13-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
  14. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 13-06, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  15. Wang, Min & Zhao, Jinhua & Bhattacharya, Joydeep, 2013. "Optimal Health and Environmental Policies in a Pollution-Growth Nexus," Staff General Research Papers, Iowa State University, Department of Economics 35994, Iowa State University, Department of Economics.

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