Working Paper: CEPR ID: DP2905
Authors: John Hassler; Jos V. RodrÃguez Mora; Kjetil Storesletten; Fabrizio Zilibotti
Abstract: This Paper provides an analytical characterization of Markov perfect equilibria in a model with repeated majority voting, where agents vote over income redistribution. The key feature of the theory is that the future constituency of redistributive policies depends positively on the current level of redistribution, since this affects both private investments and the future distribution of voters. Agents vote rationally, and fully anticipate the effects of their political choice on both private incentives and future voting outcomes. The equilibrium features multiple steady-states, one with and one without a welfare state. The theory can explain why welfare state institutions, originally introduced in response to specific shocks (e.g., the Great Depression), have been so persistent.
Keywords: education; markov equilibrium; multiple equilibria; policy behaviour; complementarity; redistribution; repeated voting; wage inequality; welfare state
JEL Codes: D72; E62; H11; H31; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial political majority (D72) | persistence of redistributive policies (P35) |
| temporary shock (F32) | continued support for welfare state institutions (P16) |
| welfare state institutions (P16) | support over time (C41) |
| increase in wage premiums (J31) | weaken political support for the welfare state (P16) |
| stronger private incentives to invest in education (I26) | reduce constituency for redistributive policies (D72) |