Two-sided Intergenerational Transfer Policy and Economic Development: A Politico-economic Approach
We consider an overlapping generations model with public education and social security where the overall size of these policies is determined in a repeated voting game. We investigate the interaction between the politically determined policies and economic development in a Markov perfect equilibrium. The following results are obtained. First, the level of human capital determines whether these policies are sustained in the Markov perfect equilibrium. Second, if the level of initial human capital is sufficiently high, human capital grows forever. In contrast, if the level of initial human capital is low, the economy might be caught in a poverty trap.
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