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A Distributional Theory of Government Growth

  • Holger Strulik

    (Institute of Economics, University of Copenhagen)

This paper presents a closed form solution for time-consistent taxation and public spending in a dynamic game between government and median voter. Extending Meltzer and Richard’s static analysis of government size the paper offers a theory of growth of government. At low stages of economic development the median voter, identified as a relatively poor worker, prefers to have no or only small redistributive taxation in order to foster savings. Through this channel he expects improvements of his labor productivity and wage. At higher stages of development, however, when capital is relatively abundant and prospects of further labor productivity gains through capital accumulation are smaller, the incentive to tax and redistribute income rises. Yet, in line with previous work on growth and infrastructure spending the median voter prefers a constant share of productive public spending at all times. Hence, government growth is solely driven by an expanding welfare state.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 04-26.

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Length: 16 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:kud:kuiedp:0426
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  1. Benabou, R., 1996. "Inequality and Growth," Working Papers 96-22, C.V. Starr Center for Applied Economics, New York University.
  2. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
  3. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2003. "The Survival of the Welfare State," American Economic Review, American Economic Association, vol. 93(1), pages 87-112, March.
  4. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  5. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
  6. 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 S103-26, October.
  7. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  8. Grossmann, Volker, 2003. "Income inequality, voting over the size of public consumption, and growth," European Journal of Political Economy, Elsevier, vol. 19(2), pages 265-287, June.
  9. Hans-Werner Sinn, 2000. "Germany's Economic Unification. An Assessment after Ten Years," CESifo Working Paper Series 247, CESifo Group Munich.
  10. Kevin J. Lansing, 1998. "Optimal redistributive capital taxation in a neoclassical growth model," Working Papers in Applied Economic Theory 99-01, Federal Reserve Bank of San Francisco.
  11. Giuseppe Bertola, 1991. "Factor Shares and Savings in Endogenous Growth," NBER Working Papers 3851, National Bureau of Economic Research, Inc.
  12. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  13. Paul, Gilles Saint & Verdier, Thierry, 1996. "Inequality, redistribution and growth: A challenge to the conventional political economy approach," European Economic Review, Elsevier, vol. 40(3-5), pages 719-728, April.
  14. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
  15. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 645-61, October.
  16. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
  17. Kemp, Murray C & Long, Ngo Van & Shimomura, Koji, 1993. "Cyclical and Noncyclical Redistributive Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 415-29, May.
  18. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
  19. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  20. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  21. Branko Milanovic, 2003. "The median voter hypothesis, income inequality and income," HEW 0305001, EconWPA.
  22. Holger Strulik, 2002. "Fiscal Policy Reforms in a Global Economy," International Tax and Public Finance, Springer, vol. 9(1), pages 73-91, January.
  23. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  24. Husted, Thomas A & Kenny, Lawrence W, 1997. "The Effect of the Expansion of the Voting Franchise on the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 54-82, February.
  25. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  26. Li, Hongyi & Squire, Lyn & Zou, Heng-fu, 1998. "Explaining International and Intertemporal Variations in Income Inequality," Economic Journal, Royal Economic Society, vol. 108(446), pages 26-43, January.
  27. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
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