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The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy

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  • Ryo Arawatari

    ()
    (Faculty of Economics, Shinshu University)

  • Tetsuo Ono

    ()
    (Graduate School of Economics, Osaka University)

Abstract

This paper introduces an overlapping-generations model with earnings hetero- geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen- erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-38-Rev.

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Length: 44 pages
Date of creation: Nov 2009
Date of revision: Aug 2010
Handle: RePEc:osk:wpaper:0938r

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Web page: http://www.econ.osaka-u.ac.jp/
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Keywords: Borrowing constraint; Social security; Public goods provision; Ends- against-the-middle equilibrium; Wage inequality;

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