Democratic public good provision

John Hassler, Institute for International Economic Studies, Stockholm University and CEPR
Kjetil Storesletten, Department of Economics, University of Oslo and CEPR
Fabrizio Zilibotti, Institute for International Economic Studies, Stockholm University and CEPR

Abstract

This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations.We focus on politicoeconomic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving.