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A second chance at success: A political economy perspective

  • Arawatari, Ryo
  • Ono, Tetsuo

This paper characterizes a stationary Markov-perfect political equilibrium where agents vote over income taxation that distorts educational investment. Agents become rich or poor through educational investment, and the poor have a second chance at success. The results show the following concerning the cost of a second chance. First, when the cost is low, the economy is characterized by high levels of upward mobility and inequality, and a low tax burden supported by the poor with prospects for upward mobility. Second, when the cost is high, there are multiple equilibria with various patterns of upward mobility, inequality and redistribution. Numerical examples show that the shift from a high-cost economy to a low-cost economy may reduce social welfare.

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File URL: http://www.sciencedirect.com/science/article/B6WJ3-4V3547N-4/2/366596aab2b9c7198680c05c003c242b
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 3 (May)
Pages: 1249-1277

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:3:p:1249-1277
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  16. Ryo Arawatari & Tetsuo Ono, 2007. "Dynamic Political Economy of Redistribution Policy: The Role of Education Costs," Discussion Papers in Economics and Business 07-31-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Nov 2007.
  17. Marco Bassetto, 1999. "Political economy of taxation in an overlapping-generations economy," Discussion Paper / Institute for Empirical Macroeconomics 133, Federal Reserve Bank of Minneapolis.
  18. Kristov, Lorenzo & Lindert, Peter & McClelland, Robert, 1992. "Pressure groups and redistribution," Journal of Public Economics, Elsevier, vol. 48(2), pages 135-163, July.
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