Working Paper: NBER ID: w3668
Authors: Alberto Alesina; Dani Rodrik
Abstract: This paper studies the relationship between political conflict and economic growth in a simple model of endogenous growth with distributive conflicts. We study both the case of two "classes" (workers and capitalists) and the case of a continuum distribution of agents, characterized by different capital/labor shares. We establish several results concerning the relationship between the political influence of the two groups and the level of taxation, public investment, redistribution of income and growth. For example, it is shown that policies which maximize growth are optimal only for a government that cares only about the "capitalists." Also, we show that in a democracy (where the "median voter theorem' applies) the rate of taxation is higher and the rate of growth lower, the more unequal is the distribution of wealth We present empirical results consistent with these implications of the model.
Keywords: Political Conflict; Economic Growth; Wealth Distribution; Taxation; Public Investment
JEL Codes: D72; E62; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government prioritizing capitalists (P16) | higher growth rates (O49) |
| wealth inequality (D31) | lower growth rates (O49) |
| higher wealth inequality (D31) | higher taxation (H29) |
| different discount rates between capitalists and workers (E25) | dynamic inconsistency in optimal taxation policies (H21) |
| government decisions on tax rates and public investments (H59) | influenced by political power of economic groups (D72) |