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The Composition of Government Expenditure in an Overlapping Generations Model

Author Info

  • John Creedy
  • Shuyun May Li
  • Solmaz Moslehi

Abstract

This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-08/1043.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1043.

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Length: 36 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1043
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Keywords: Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions;

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Find related papers by JEL classification:
  • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
  • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
  • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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  2. Ghiglino, Christian & Tvede, Mich, 2000. "Optimal Policy in OG Models," Journal of Economic Theory, Elsevier, vol. 90(1), pages 62-83, January.
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  10. 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.
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  12. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  13. Been-Lon Chen, 2006. "Economic growth with an optimal public spending composition," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 123-136, January.
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  17. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
  18. Borge, Lars-Erik & Rattso, J.Jorn, 2004. "Income distribution and tax structure: Empirical test of the Meltzer-Richard hypothesis," European Economic Review, Elsevier, vol. 48(4), pages 805-826, August.
  19. Richard Disney, 2006. "Household Saving Rates and the Design of Public Pension Programmes: Cross–Country Evidence," National Institute Economic Review, National Institute of Economic and Social Research, vol. 198(1), pages 61-74, October.
  20. John Creedy & Solmaz Moslehi, 2007. "Modelling the Composition of Government Expenditure in Democracies," Department of Economics - Working Papers Series 1007, The University of Melbourne.
  21. Rainald Borck, 2005. "Voting, Inequality, and Redistribution," Discussion Papers of DIW Berlin 503, DIW Berlin, German Institute for Economic Research.
  22. 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.
  23. John Creedy & Solmaz Moslehi, 2007. "The Optimal Composition of Government Expenditure," Department of Economics - Working Papers Series 1008, The University of Melbourne.
  24. Bearse, P. & Glomm, G. & Jeneba, E., 1999. "Composition of Government Budget, Non-Single Peakedness and Majority Voting," Papers 9903, Michigan State - Econometrics and Economic Theory.
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Cited by:

  1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2013. "Using surveys of business perceptions as a guide to growth-enhancing fiscal reforms," ZEW Discussion Papers 13-012, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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