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On the size of U.S. government: political economy in the neoclassical growth model

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  • Per Krusell
  • Jose-Victor Rios-Rull

Abstract

We study a dynamic version of Meltzer and Richard's median-voter analysis of the size of government. Taxes are proportional to total income, and they are used for government consumption, which is exogenous, and for lump-sum transfers, whose size is chosen by electoral vote. Votes take place sequentially over time, and each agent votes for the policy that maximizes his equilibrium utility. We calibrate the model and its income and wealth distribution to match postwar U.S. data. This allows a quantitative assessment of the equilibrium costs of redistribution, which involves distortions to the labor-leisure and consumption-savings choices, and of its benefits for the decisive voter. We find that the total size of transfers predicted by our political-economy model is quite close to the size of transfers in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 234.

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Date of creation: 1997
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Handle: RePEc:fip:fedmsr:234

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Keywords: Econometric models ; Taxation;

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  1. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
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  14. Krusell, Per & Rios-Rull, Jose-Victor, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 301-29, April.
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  27. repec:fth:coluec:595 is not listed on IDEAS
  28. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  29. Per Krusell & José-Victor Ríos-Rull, 1994. "What Constitutions Promote Capital Accumulation? A Political-Economy Approach," Wallis Working Papers WP1, University of Rochester - Wallis Institute of Political Economy.
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