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Redistributive Politics and Government Debt in a Borrowing-constrained Economy

Author

Listed:
  • Ryo Arawatari

    () (Faculty of Economics, Shinshu University)

  • Tetsuo Ono

    () (Graduate School of Economics, Osaka University)

Abstract

We develop a two-period, three-class of income model where low-income agents are borrowing constrained because of capital market imperfections, and where redistributive expenditure is financed by tax and government debt. When the degree of capital market imperfection is high, there is an ends-against-the-middle equilibrium where the constrained low-income and the unconstrained high-income agents favor low levels of government debt and redistributive expenditure; these agents form a coalition against the middle. In this equilibrium, the levels of government debt and expenditure are below the efficient levels, and the spread of income distribution results in a lower debt-to-GDP ratio.

Suggested Citation

  • Ryo Arawatari & Tetsuo Ono, 2011. "Redistributive Politics and Government Debt in a Borrowing-constrained Economy," Discussion Papers in Economics and Business 11-02-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Sep 2011.
  • Handle: RePEc:osk:wpaper:1102r
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    References listed on IDEAS

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    More about this item

    Keywords

    Government debt; Borrowing constraints; Voting; Structure-induced equilibrium; Income inequality.;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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