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The Survival of the Welfare State

Author

Listed:
  • Hassler, John

    (Institute for International Economic Studies, Stockholm University)

  • Mora, Jose

    (Universitat Pompeu Fabra)

  • Storesletten, Kjetil

    (Institute for International Economic Studies, Stockholm University)

  • Zilibotti, Fabrizio

    (Institute for International Economic Studies, Stockholm University)

Abstract

This paper provides an analytical characterization of Markov perfect equilibria in a politico-economic model with repeated voting, where agents vote over distortionary 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 model features multiple equilibria. In "pro-welfare" equilibria, both welfare state policies and their effects on distribution persist forever. In "anti-welfare equilibria", even a majority of beneficiaries of redistributive policies vote strategically so as to induce the formation of a future majority that will vote for zero redistribution.

Suggested Citation

  • Hassler, John & Mora, Jose & Storesletten, Kjetil & Zilibotti, Fabrizio, 2002. "The Survival of the Welfare State," Seminar Papers 704, Stockholm University, Institute for International Economic Studies.
  • Handle: RePEc:hhs:iiessp:0704
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    More about this item

    Keywords

    repeated voting; Markov equilibrium; multiple equilibria; welfare state; redistribution; political economy; policy persistence; wage inequality; education;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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