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

  • Ryo Arawatari

    ()

    (Faculty of Economics, Shinshu University)

  • Tetsuo Ono

    ()

    (Graduate School of Economics, Osaka University)

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.

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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 09-38.

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Length: 38 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:osk:wpaper:0938
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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