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Redistributive Politics and Government Debt in a Borrowing-constrained Economy

  • Ryo Arawatari

    ()

    (Faculty of Economics, Shinshu University)

  • Tetsuo Ono

    ()

    (Graduate School of Economics, Osaka University)

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.

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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 11-02-Rev.

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Length: 44 pages
Date of creation: Jan 2011
Date of revision: Sep 2011
Handle: RePEc:osk:wpaper:1102r
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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