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Endogenous Public Policy and Long-Run Growth: Some Simple Analytics

We study the determinants of voting outcomes on the provision of public consumption through marginal income taxes in the context of the simple linear growth model. We provide analytical results on how the dynamic politicoeconomic equilibrium maps the economic fundamentals to policies and long-run growth. We find that in a deterministic growth environment voters internalize, although imperfectly, the deadweight losses of taxation and vote for lower taxes when the productivity of capital is higher. Therefore, the politicoeconomic channel reinforces the positive role of productivity for growth. In a stochastic linear-growth environment where business cycles are driven by productivity shocks, in line with existing evidence, we find that the level of endogenous public consumption is procyclical but its share of GDP is countercyclical.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0502.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0502.

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Date of creation: Jan 2005
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Handle: RePEc:vie:viennp:0502
Contact details of provider: Web page: http://www.univie.ac.at/vwl

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