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The Composition of Government Expenditure in an Overlapping Generations Model

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  • John Creedy
  • Shuyun May Li
  • Solmaz Moslehi

Abstract

This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1043.

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Length: 36 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1043

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Web page: http://www.economics.unimelb.edu.au
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Keywords: Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions;

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References

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  1. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  2. P R Agénor, 2005. "Fiscal Policy and Endogenous Growth with Public Infrastructure," Centre for Growth and Business Cycle Research Discussion Paper Series 59, Economics, The Univeristy of Manchester.
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  13. Creedy, John & Moslehi, Solmaz, 2009. "Modelling the composition of government expenditure in democracies," European Journal of Political Economy, Elsevier, vol. 25(1), pages 42-55, March.
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  17. John Creedy & Solmaz Moslehi, 2007. "The Optimal Composition of Government Expenditure," Department of Economics - Working Papers Series 1008, The University of Melbourne.
  18. Borge, Lars-Erik & Rattso, J.Jorn, 2004. "Income distribution and tax structure: Empirical test of the Meltzer-Richard hypothesis," European Economic Review, Elsevier, vol. 48(4), pages 805-826, August.
  19. Volker Grossmann, 2002. "Income Inequality, Voting Over the Size of Public Consumption, and Growth," CESifo Working Paper Series 731, CESifo Group Munich.
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  24. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  25. Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753.
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Cited by:
  1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Using Surveys of Business Perceptions as a Guide to Growth-Enhancing Fiscal Reforms," Working Paper Series 3140, Victoria University of Wellington, Chair in Public Finance.

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