Dynamic Bargaining over Redistribution in Legislatures

In modern democracies, public policies are negotiated by elected policymakers. When they agree to replace the current status quo, the approved policy becomes the status quo in the next period. Yet, these two ingredients, bargaining and endogenous status quo, are absent from most macroeconomic models. We revisit the classical capital taxation problem including both ingredients. We analyze a growth model where agents are heterogenous in wealth. We nd that legislators may avoid high taxes, because doing so may improve the bargaining power of \poorer" legislators in future negotiations. Equilibrium capital taxes are between 12% and 55%, depending on the calibration. We also nd that a status quo bias could lead to growth cycles: decades with low taxes and growing capital are fol lowed by decades with high taxes and decreasing capital (and vice versa).