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The Politics of Endogenous Growth

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  • Chetan Ghate
  • Paul J. Zak

Abstract

Is it politically feasible for governments to engineer endogenous growth? This paper illustrates two reasonable political decision mechanisms by which fiscal policy generates endogenous growth with a single accumulable factor, under a constant returns to scale production technology, and without production externalities. In the first mechanism, optimal policies are chosen by the government to maximize constituent support by raising aggregate income. In the second mechanism, optimal policies are determined in a voting equilibrium where agents are concerned only with their own incomes. We demonstrate that policies that target aggregates generate balanced growth and are Pareto optimal. Policies chosen by the median voter also produce balanced growth, but result in public investment 50% below the socially optimal level.

Suggested Citation

  • Chetan Ghate & Paul J. Zak, 2003. "The Politics of Endogenous Growth," Discussion Papers of DIW Berlin 320, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp320
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
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    4. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
    5. Ghate, Chetan & Zak, Paul J., 2002. "Growth of government and the politics of fiscal policy," Structural Change and Economic Dynamics, Elsevier, vol. 13(4), pages 435-455, December.
    6. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    7. Ghate, Chetan, 2001. "Lobbying, the Composition of Government Expenditures, and the Politics of Fiscal Policy," Australian Economic Papers, Wiley Blackwell, vol. 40(2), pages 133-145, June.
    8. Fisher, Walter H & Turnovsky, Stephen J, 1998. "Public Investment, Congestion, and Private Capital Accumulation," Economic Journal, Royal Economic Society, vol. 108(447), pages 399-413, March.
    9. Chetan Ghate & Quan Vu Le & Paul J. Zak, 2003. "Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 583-598, November.
    10. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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    Cited by:

    1. Fic, Tatiana & Ghate, Chetan, 2005. "The welfare state, thresholds, and economic growth," Economic Modelling, Elsevier, vol. 22(3), pages 571-598, May.
    2. Alcántar-Toledo, Javier & Venieris, Yannis P., 2014. "Fiscal policy, growth, income distribution and sociopolitical instability," European Journal of Political Economy, Elsevier, vol. 34(C), pages 315-331.
    3. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2016. "Factor income taxation, growth, and investment specific technological change," Economic Modelling, Elsevier, vol. 57(C), pages 133-152.

    More about this item

    Keywords

    Public Investment; Positive Political Economy; Median Voter Theorem; Endogenous Growth;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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