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A Dynamic Politico-Economic Model of Intergenerational Contracts

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  • Lancia, Francesco
  • Russo, Alessia

Abstract

This paper investigates the conditions for the emergence of implicit intergenerational contracts without assuming reputation mechanisms, commitment technology and altruism. We present a tractable dynamic politico-economic model in OLG environment where politicians play Markovian strategies in a probabilistic voting environment, setting multidimensional political agenda. Both backward and forward intergenerational transfers, respectively in the form of pension benefits and higher education investments, are simultaneously considered in an endogenous human capital setting with labor income taxation. On the one hand, social security sustains investment in public education; on the other hand investment in education creates a dynamic linkage across periods through both human and physical capital driving the economy toward different Welfare State Regimes. Embedding a repeated-voting setup of electoral competition, we find that in a dynamic efficient economy both forward and backward intergenerational transfers simultaneously arise. The equilibrium allocation is education efficient, but, due to political overrepresentation of elderly agents, the electoral competition process induces overtaxation compared with a Benevolent Government solution with balanced welfare weights.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24795.

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Date of creation: 26 Jul 2010
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Handle: RePEc:pra:mprapa:24795

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Keywords: aging; Benevolent Government allocation; intergenerational redistribution; Markovian equilibria; repeated voting.;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A Dynamic Politico-Economic Model of Intergenerational Contracts
    by Christian Zimmermann in NEP-DGE blog on 2010-10-13 20:15:04
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Cited by:
  1. Torben M. Andersen & Joydeep Bhattacharya, 2013. "The Intergenerational Welfare State," CESifo Working Paper Series 4359, CESifo Group Munich.
  2. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business 13-06-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Francesco Lancia & Alessia Russo, 2011. "Self-Commitment-Institutions and Cooperation in Overlapping Generations Games," Center for Economic Research (RECent) 073, University of Modena and Reggio E., Dept. of Economics.
  4. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business 13-06, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  5. Tetsuo Ono, 2014. "Economic Growth and the Politics of Intergenerational Redistribution," Discussion Papers in Economics and Business 14-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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