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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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Keywords: Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions;

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References

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  1. John Creedy & Solmaz Moslehi, 2007. "The Optimal Composition of Government Expenditure," Department of Economics - Working Papers Series 1008, The University of Melbourne.
  2. Hassler, John & Mora, José V Rodríguez & Storesletten, Kjetil & Zilibotti, Fabrizio, 2001. "The Survival of the Welfare State," CEPR Discussion Papers 2905, C.E.P.R. Discussion Papers.
  3. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, October.
  4. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  5. Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
  6. Grossman, G.M. & Helpman, E., 1996. "Intergenerational Redistribution with Short-Lived Governments," Papers 178, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Hassler, John & Storesletten, Kjetil & Zilibotti, Fabrizio, 2003. "Democratic Public Good Provision," CEPR Discussion Papers 4044, C.E.P.R. Discussion Papers.
  8. Jo Thori Lind, 2005. "Why is there so little redistribution?," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 31, pages 111-125.
  9. John Creedy & Solmaz Moslehi, 2007. "Modelling the Composition of Government Expenditure in Democracies," Department of Economics - Working Papers Series 1007, The University of Melbourne.
  10. Been-Lon Chen, 2006. "Economic growth with an optimal public spending composition," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 123-136, January.
  11. Creedy, J & Van de Ven, J, 1997. "Retirement Incomes : Private Savings versus Social Transfers," Department of Economics - Working Papers Series 569, The University of Melbourne.
  12. Rainald Borck, 2005. "Voting, Inequality, and Redistribution," Discussion Papers of DIW Berlin 503, DIW Berlin, German Institute for Economic Research.
  13. Tridimas, George & Winer, Stanley L., 2005. "The political economy of government size," European Journal of Political Economy, Elsevier, vol. 21(3), pages 643-666, September.
  14. 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.
  15. Volker Grossmann, 2002. "Income Inequality, Voting Over the Size of Public Consumption, and Growth," CESifo Working Paper Series 731, CESifo Group Munich.
  16. Ghiglino, Christian & Tvede, Mich, 1998. "Optimal policy in OG models," Working Papers 08-1998, Copenhagen Business School, Department of Economics.
  17. 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.
  18. Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753, October.
  19. Bearse, Peter & Glomm, Gerhard & Janeba, Eckhard, 2001. " Composition of Government Budget, Non-single Peakedness, and Majority Voting," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 471-81.
  20. 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.
  21. Tridimas, George, 2001. " The Economics and Politics of the Structure of Public Expenditure," Public Choice, Springer, vol. 106(3-4), pages 299-316, March.
  22. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
  23. Pierre-Richard Agénor, 2005. "Fiscal Policy and Endogenous Growth with Public Infrastructure," The School of Economics Discussion Paper Series 0536, Economics, The University of Manchester.
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Cited by:
  1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2013. "Using surveys of business perceptions as a guide to growth-enhancing fiscal reforms," ZEW Discussion Papers 13-012, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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