Intergenerational Redistribution with Short-lived Governments
We study the politics of intergenerational redistribution in an overlapping-generations model with short-lived governments. The successive governments – who care about the welfare of the currently-living generations and possibly about campaign contributions – are unable to pre-commit the future course of redistributive taxation. In a stationary politico-economic equilibrium, the tax rate in each period depends on the current state of the economy and all expectations about future political outcomes are fulfilled. We find that multiple stationary equilibria exist in many political settings. Steady-state welfare is often lower than it would be in the absence of redistributive politics.
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