Economic growth, poverty trap and intergenerational transfers

We adopt the traditional competitive OLG model a la' Samuelson (1958)-Diamond (1965) with two-period-living individuals, fixed fertility rates and labor supply, where the government can pursue retributive policies between generations by levying levy lump sum taxes/subsidies. By using standard logarithmic preferences and a CES technology with low factor substitution, we show that the taxation of the old can be used: 1) to escape from a poverty trap; 2) to increase the per-capita income in the positive high steady state. Conversely, the taxation of the young worsens the stationary per capita income and may in fact lead to the explosion of the economy. Our results may apply to the policy analysis concerning developing countries in that they show that the introduction of a PAYG social security scheme as a means of redistributing among generations may be detrimental for economic growth and for the poverty trap problem. This argument may also apply to rich countries ascaped from poverty traps. Conversely, the introduction of such instruments as public education or subsidies to children may be positive as for both economic growth and the solution of the poverty trap problem.