Working Paper: CEPR ID: DP633
Authors: Gilles Saint-Paul; Thierry Verdier
Abstract: This paper shows that multiple growth paths may occur in a politico-economic model of endogenous growth. This multiplicity is characterized by the coexistence of a low-tax, low-capital-flight equilibrium and a high-tax, high-capital-flight equilibrium. The likelihood of multiplicity is crucially related to the structure of power in society. For multiplicity to arise, it is necessary that the group in power (or the group that is decisive in determining the political outcome) has greater access to international capital markets than the average in the economy. The model provides an example of an inefficient allocation resulting from majority voting among rational agents.
Keywords: political equilibrium; endogenous growth; distributional conflict; capital flight
JEL Codes: E21; E62; H21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Access to international capital markets (F34) | multiple growth paths (O41) |
| High tax rate on capital (H24) | allocate savings abroad (D14) |
| allocate savings abroad (D14) | reduce tax base (H26) |
| reduce tax base (H26) | influence vote for higher tax rates (D72) |
| influence vote for higher tax rates (D72) | sustain high-tax equilibrium (H29) |
| high-tax equilibrium (H21) | lower growth rates (O49) |
| low-tax equilibrium (H21) | preferred by all agents (L85) |
| less elastic savings behavior (D12) | lower tax rate (H29) |
| high tax rate (H29) | inefficient allocation of resources (D61) |