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The Survival of the Welfare State

  • 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)

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.

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File URL: http://www.iies.su.se/~storeslk/papers/ws_aer02.pdf
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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 704.

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Length: 49 pages
Date of creation: 12 Feb 2002
Date of revision:
Publication status: Published in American Economic Review, 2003, pages 87-112.
Handle: RePEc:hhs:iiessp:0704
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Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden

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Web page: http://www.iies.su.se/

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