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The Political Economy of Growth, Inequality, the Size and Composition of Government Spending

Listed author(s):
  • Klaus Schmidt-Hebbel

    (Universidad Catolica de Chile)

  • José Carlos Tello

    (Departamento de Economía de la PUC del Perú)

This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is re ected by a discrete distribution of in nitely-lived agents that di er by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result { that inequality and growth could be negatively or positively related { could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent. JEL Classification-JEL: D72, E62, H11, H31

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File URL: http://files.pucp.edu.pe/departamento/economia/DDD380.pdf
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Paper provided by Departamento de Economía - Pontificia Universidad Católica del Perú in its series Documentos de Trabajo / Working Papers with number 2014-380.

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Length: 37 pages
Date of creation: 2014
Publication status: published
Handle: RePEc:pcp:pucwps:wp00380
Contact details of provider: Postal:
Av. Universitaria 1801, San Miguel, Lima, Perú

Phone: (511) 626-2000 ext. 4950, 4951
Fax: (511) 626-2874
Web page: http://departamento.pucp.edu.pe/economia/
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