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Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium


  • Martín Gonzales-Eiras

    () (Universidad de San Andrés)

  • Dirk Niepelt



We analyze the effect of changes in fertility and longevity on taxes, the composition of government spending, and productivity. To that purpose, we introduce politics in an OLG economy with endogenous growth due to human and physical capital accumulation. Population ageing shifts political power from students and workers to retirees, leading to a reallocation of resources from education spending to retirement benefits and a slowdown of productivity growth. Calibrated to U.S. data, the closed-form solutions of the model predict retirement benefits as a share of GDP to strongly increase over the next decades and the education share to fall. This effect depresses the annual productivity growth rate by 10 basis points. In spite of higher labor-income taxes, per-capita labor supply is predicted to rise, as a consequence of increased life expectancy. The equilibrium allocation is consumption and production efficient, but the political process allocates a much smaller share of resources to eduction than a Ramsey planner with balanced welfare weights.

Suggested Citation

  • Martín Gonzales-Eiras & Dirk Niepelt, 2007. "Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium," Working Papers 07.05, Swiss National Bank, Study Center Gerzensee.
  • Handle: RePEc:szg:worpap:0705

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    References listed on IDEAS

    1. Assar Lindbeck & Jörgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, vol. 52(3), pages 273-297, January.
    2. Dirk Niepelt & Martin Gonzalez-Eiras, 2008. "Economic and Politico-Economic Equivalence of Fiscal Policies," 2008 Meeting Papers 631, Society for Economic Dynamics.
    3. William F. Blankenau & Nicole B. Simpson & Marc Tomljanovich, 2007. "Public Education Expenditures, Taxation, and Growth: Linking Data to Theory," American Economic Review, American Economic Association, vol. 97(2), pages 393-397, May.
    4. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
    5. Giorgio Bellettini & Carlotta Berti Ceroni, 1999. "Is Social Security Really Bad for Growth?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 796-819, October.
    6. Martin Gonzalez Eiras & Dirk Niepelt, 2004. "Sustaining Social Security," Working Papers 72, Universidad de San Andres, Departamento de Economia, revised Jun 2004.
    7. Antonio Rangel, 2003. "Forward and Backward Intergenerational Goods: Why Is Social Security Good for the Environment?," American Economic Review, American Economic Association, vol. 93(3), pages 813-834, June.
    8. Grossman, Gene M & Helpman, Elhanan, 1998. "Intergenerational Redistribution with Short-Lived Governments," Economic Journal, Royal Economic Society, vol. 108(450), pages 1299-1329, September.
    9. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    10. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
    11. James M. Poterba, 1997. "Demographic structure and the political economy of public education," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(1), pages 48-66.
    12. Roberto Perotti, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 755-776.
    13. Gonzalez-Eiras, Marti­n & Niepelt, Dirk, 2008. "The future of social security," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 197-218, March.
    14. Mulligan Casey B & Sala-i-Martin Xavier, 2004. "Internationally Common Features of Public Old-Age Pensions, and Their Implications for Models of the Public Sector," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-37, May.
    15. Campbell, John Y & Viceira, Luis M, 2005. "The Term Structure of the Risk-Return Tradeoff," CEPR Discussion Papers 4914, C.E.P.R. Discussion Papers.
    16. repec:fth:prinin:334 is not listed on IDEAS
    17. Marco Bassetto, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1167-1210.
    18. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
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    Cited by:

    1. Gonzalez-Eiras, Martín & Niepelt, Dirk, 2012. "Ageing, government budgets, retirement, and growth," European Economic Review, Elsevier, vol. 56(1), pages 97-115.
    2. Çagaçan Deger, 2008. "Pension Reform in an OLG Model with Multiple Social Security Systems," ERC Working Papers 0805, ERC - Economic Research Center, Middle East Technical University, revised Oct 2008.
    3. Carmignani, Fabrizio, 2009. "The distributive effects of institutional quality when government stability is endogenous," European Journal of Political Economy, Elsevier, vol. 25(4), pages 409-421, December.
    4. Kuehnel, Johanna, 2011. "Population Aging, the Composition of Government Spending,and Endogenous Economic Growth in Politico-Economic Equilibrium," Working Papers 0510, University of Heidelberg, Department of Economics.
    5. repec:eee:hapoch:v1_381 is not listed on IDEAS

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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