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The Dynamics of Inequality and Social Security in General Equilibrium

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Author Info
Song, Zheng

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Abstract

This paper analyzes the dynamic politico-economic equilibrium of a model where repeated voting on social security and the evolution of household characteristics in general equilibrium are mutually affected over time. In particular, we incorporate within-cohort heterogeneity in a two-period Overlapping-Generation model to capture the intra-generational redistributive effect of social security transfers. Political decision-making is represented by a probabilistic voting à la Lindbeck and Weibull (1987). We analytically characterize the Markov perfect equilibrium, in which social security tax rates are shown to be increasing in wealth inequality. The dynamic interaction between inequality and social security leads to growing social security programs. We also perform some normative analysis, showing that the politico-economic equilibrium outcomes are fundamentally different from the Ramsey allocation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10365.

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Date of creation: 08 Apr 2008
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Handle: RePEc:pra:mprapa:10365

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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