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The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy

Author

Listed:
  • Ryo Arawatari

    (Faculty of Economics, Shinshu University)

  • Tetsuo Ono

    (Graduate School of Economics, Osaka University)

Abstract

This paper introduces an overlapping generations model with earnings heterogeneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and public goods provision are determined in a bidimensional majoritarian voting game played by successive generations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where lowand high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if either: (i) higher wage inequality is associated with the borrowing constraint and a low intertemporal elasticity of substitution, or (ii) the population growth rate becomes lower.

Suggested Citation

  • Ryo Arawatari & Tetsuo Ono, 2009. "The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy," Discussion Papers in Economics and Business 09-38, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0938
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    More about this item

    Keywords

    Borrowing constraint; Social security; Public goods provision; Structureinduced equilibrium; Ends-against-the-middle equilibrium; Wage inequality; Population aging;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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