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Transitional Dynamics in a Growth Model with Distributive Politics

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  • Chetan Ghate

Abstract

This paper constructs a dynamic analysis of the growth and distribution models of Das and Ghate (2004) and Alesina and Rodrik (1994) when leisure is valued by agents. When leisure enters the utility function, we show that the tax rate on capital income chosen in a political equilibrium is lower than the growth maximizing tax rate. This slows growth down, but for a very different reason than in Alesina and Rodrik (1994). Here, unanimity holds, and slower growth comes together with valued leisure, while in AR, slower growth comes from conflicting choices over the tax rate, with a capital poor median voter prevailing. Our results generalize the work of Alesina and Rodrik (1994) and Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the effect of income inequality on the tax rate and labor supply. Second, using the set up of Das and Ghate (2004), we provide a dynamic analysis of Alesina and Rodrik (1994) where majority voting determines the extent of distribution, and thus, a relationship between inequality and growth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth with endogenous leisure is not intractable.

Suggested Citation

  • Chetan Ghate, 2006. "Transitional Dynamics in a Growth Model with Distributive Politics," Papers on Entrepreneurship, Growth and Public Policy 2006-22, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
  • Handle: RePEc:esi:egpdis:2006-22
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    References listed on IDEAS

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    1. Stiglitz, Joseph E, 1969. "Distribution of Income and Wealth among Individuals," Econometrica, Econometric Society, vol. 37(3), pages 382-397, July.
    2. Saint-Paul, Gilles & Verdier, Thierry, 1993. "Education, democracy and growth," Journal of Development Economics, Elsevier, vol. 42(2), pages 399-407, December.
    3. 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.
    4. Das Satya P & Ghate Chetan, 2004. "Endogenous Distribution, Politics, and the Growth-Equity Tradeoff," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-32, July.
    5. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 151-172.
    6. Yamarik, Steven, 2001. "Nonlinear Tax Structures and Endogenous Growth," Manchester School, University of Manchester, vol. 69(1), pages 16-30, January.
    7. Banerjee, Abhijit V & Duflo, Esther, 2003. "Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-299, September.
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    More about this item

    Keywords

    Distributive Conflict; Endogenous Distribution; Median Voter Theorem; Endogenous Growth; Positive Political Economy;

    JEL classification:

    • 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
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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