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A Second Chance at Success: A Political Economy Perspective?

  • Ryo Arawatari

    ()

    (Graduate School of Economics, Osaka University)

  • Tetsuo Ono

    ()

    (Graduate School of Economics, Osaka University)

This paper characterizes a stationary Markov perfect political equilibrium where agents vote over income taxation that distorts their educational investment. Agents become rich or poor through educational investment, and the poor have a second chance at success. The results show the following concerning the costs of a second chance. First, when the cost is low, the economy is characterized by high levels of upward mobility and inequality, and a low tax burden supported by the poor with prospects for upward mobility. Second, when the cost is high, there are multiple equilibria: one is characterized by high levels of upward mobility and inequality and a low tax burden supported by the rich, the other is characterized by low levels of upward mobility and inequality and a high tax burden supported by the poor. Numerical examples show that the low-cost economy is inferior to the high-cost economy in terms of social welfare.

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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 08-04.

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Length: 44 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:osk:wpaper:0804
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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  1. Grossman, G.M. & Helpman, E., 1996. "Intergenerational Redistribution with Short-Lived Governments," Papers 178, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Alesina, Alberto & La Ferrara, Eliana, 2005. "Preferences for redistribution in the land of opportunities," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 897-931, June.
  3. Bénabou, Roland & Ok, Efe A, 1998. "Social Mobility and the Demand for Redistribution: the POUM Hypothesis," CEPR Discussion Papers 1955, C.E.P.R. Discussion Papers.
  4. Ryo Arawatari & Tetsuo Ono, 2008. "A Second Chance at Success: A Political Economy Perspective?," Discussion Papers in Economics and Business 08-04, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  5. Aaberge, Rolf & Björklund, Anders & Jäntti, Markus & Palme, Mårten & Pedersen, Peder & Smith, Nina & Wennemo, Tom, 1996. "Income Inequality and Income Mobility in the Scandinavian Countries Compared to the United States," SSE/EFI Working Paper Series in Economics and Finance 98, Stockholm School of Economics, revised Aug 2002.
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  7. Hassler, John & Storesletten, Kjetil & Zilibotti, Fabrizio, 2007. "Democratic public good provision," Journal of Economic Theory, Elsevier, vol. 133(1), pages 127-151, March.
  8. Kristov, L. & Lindert, P. & Mcclelland, R., 1990. "Pressure Groups And Redistribution," Papers 66, California Davis - Institute of Governmental Affairs.
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  11. repec:ebl:ecbull:v:4:y:2008:i:13:p:1-13 is not listed on IDEAS
  12. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
  13. Ryo Arawatari & Tetsuo Ono, 2007. "Dynamic Political Economy of Redistribution Policy: The Role of Education Costs," Discussion Papers in Economics and Business 07-31-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Nov 2007.
  14. Lorenzo Forni, 2005. "Social Security as Markov Equilibrium in OLG Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 178-194, January.
  15. La Ferrara, Eliana & Alesina, Alberto, 2005. "Preferences for Redistribution in the Land of Opportunities," Scholarly Articles 4552533, Harvard University Department of Economics.
  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. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  18. Francisco Rodríguez, 2004. "Inequality, Redistribution, And Rent-Seeking," Economics and Politics, Wiley Blackwell, vol. 16, pages 287-320, November.
  19. Martin Gonzalez-Eiras & Dirk Niepelt, 2007. "The Future of Social Security," Working Papers 07.02, Swiss National Bank, Study Center Gerzensee.
  20. Quadrini, Vincenzo, 1999. "Growth, learning and redistributive policies," Journal of Public Economics, Elsevier, vol. 74(2), pages 263-297, November.
  21. 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.
  22. Glomm, Gerhard & Ravikumar, B., 1996. "Endogenous public policy and multiple equilibria," European Journal of Political Economy, Elsevier, vol. 11(4), pages 653-662, April.
  23. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
  24. Saint Paul, Gilles & Verdier, Thierry, 1997. " Power, Distributive Conflicts, and Multiple Growth Paths," Journal of Economic Growth, Springer, vol. 2(2), pages 155-68, July.
  25. Jarvis, Sarah & Jenkins, Stephen P, 1998. "How Much Income Mobility Is There in Britain?," Economic Journal, Royal Economic Society, vol. 108(447), pages 428-43, March.
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