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The Composition of Government Expenditure in an Overlapping Generations Model

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Listed author(s):
  • 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://fbe.unimelb.edu.au/__data/assets/pdf_file/0009/802728/1043.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
Handle: RePEc:mlb:wpaper:1043
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Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia

Phone: +61 3 8344 8560
Fax: +61 3 8344 6899
Web page: http://fbe.unimelb.edu.au/economics
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Keywords: Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions;

Other versions of this item:

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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Cited by:

  1. Florian Misch & Norman Gemmell & Richard Kneller, 2014. "Using surveys of business perceptions as a guide to growth-enhancing fiscal reforms," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 22(4), pages 683-725, October.

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