The Survival of the Welfare State

John Hassler, Institute for International Economic Studies, Stockholm University, CEPR, CESIfo and IZA
José V. Rodríguez Mora, Department of Economics, Universitat Pomoeu Fabra and CEPR
Kjetil Storesletten, Institute for International Economic Studies, Stockholm University and CEPR
Fabrizio Zilibotti, Department of Economics, University College London, CEPR and Institute for Economic Studies, Stockholm University

Abstract

This paper provides an analytical characterization of Markov perfect equilibria in a model with repeated voting, where agents vote over distortionary income redistribution. A key result is that the future constituency for redistributive policies depends positively on current redistribution, since this affects both private investments and the future distribution of voters. The model features multiple equilibria. In some equilibria, positive redistribution persists forever. In other equilibria, even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period. Skill-biased technical change makes the survival of the welfare state less likely.