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The Survival of the Welfare State

  • Hassler, John
  • Mora, José V Rodríguez
  • Storesletten, Kjetil
  • Zilibotti, Fabrizio

This Paper provides an analytical characterization of Markov perfect equilibria in a model with repeated majority voting, where agents vote over income redistribution. The key feature of the theory is that the future constituency of redistributive policies depends positively on the current level of redistribution, since this affects both private investments and the future distribution of voters. Agents vote rationally, and fully anticipate the effects of their political choice on both private incentives and future voting outcomes. The equilibrium features multiple steady-states, one with and one without a welfare state. The theory can explain why welfare state institutions, originally introduced in response to specific shocks (e.g., the Great Depression), have been so persistent.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2905.

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Date of creation: Aug 2001
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Handle: RePEc:cpr:ceprdp:2905
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  12. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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  15. Saint-Paul, Gilles, 1994. "The Dynamics of Exclusion and Fiscal Conservatism," CEPR Discussion Papers 998, C.E.P.R. Discussion Papers.
  16. Hassler, J. & Mora, J.V.R. & Storesletten, K. & Zilibotti, F., 1999. "Equilibrium Unemployment Insurance," Papers 665, Stockholm - International Economic Studies.
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  25. Marco Bassetto, 1999. "Political economy of taxation in an overlapping-generations economy," Discussion Paper / Institute for Empirical Macroeconomics 133, Federal Reserve Bank of Minneapolis.
  26. 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.
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  29. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
  30. 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.
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