The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy

Ryo Arawatari and Tetsuo Ono

No 09-38, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper introduces an overlapping generations model with earnings heterogeneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and public goods provision are determined in a bidimensional majoritarian voting game played by successive generations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where lowand high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if either: (i) higher wage inequality is associated with the borrowing constraint and a low intertemporal elasticity of substitution, or (ii) the population growth rate becomes lower.

Keywords: Borrowing constraint; Social security; Public goods provision; Structureinduced equilibrium; Ends-against-the-middle equilibrium; Wage inequality; Population aging (search for similar items in EconPapers)
JEL-codes: D72 H41 H55 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2009-11
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pol
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Working Paper: The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:0938

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