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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 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.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0938R.pdf
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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-Rev.

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Length: 44 pages
Date of creation: Nov 2009
Date of revision: Aug 2010
Handle: RePEc:osk:wpaper:0938r
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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