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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 hetero- geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen- erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and 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 higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.

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-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2010.
  • Handle: RePEc:osk:wpaper:0938r
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Borrowing constraint; Social security; Public goods provision; Ends- against-the-middle equilibrium; Wage inequality;

    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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