English, Article, Journal or magazine article edition: Transitional dynamics in a growth model with distributive politics Chetan Ghate

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Transitional Dynamics in a Growth Model with Distributive Politics
Author
  • Chetan Ghate
Physical Description
  • preprint
Notes
  • This paper constructs a heterogenous agent model of endogenous distribution and growth. When the labor leisure choice of agents is exogenous, the factor holding ratios of households converges to a mass point that is independent of the initial distribution of capital in the steady state. There is complete equality and every household's preferred tax rate equals the growth maximizing tax rate. There is no distributive con.ict in the long run. When the labor leisure choice of households is endogenous, there is also complete convergence in the factor holding ratios of agents in the steady state. This implies that there is unanimity over preferred tax rates as in the previous case, although the preferred tax rate of households is less than the growth maximizing tax rate. We identify the intuition behind this result. Our results also extend the model of endogenous distribution and growth in Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the e.ect of income inequality on the tax rate and labor supply. Second, the model is solved using a more empirically plausible speci.cation of the government budget constraint in which households vote over the tax rate on capital income instead of a tax on wealth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth is not an intractable proposition.
  • RePEc:ind:isipdp:05-07
  • This paper constructs a dynamic analysis of the growth and distribution models of Das and Ghate (2004) and Alesina and Rodrik (1994) when leisure is valued by agents. When leisure enters the utility function, we show that the tax rate on capital income chosen in a political equilibrium is lower than the growth maximizing tax rate. This slows growth down, but for a very different reason than in Alesina and Rodrik (1994). Here, unanimity holds, and slower growth comes together with valued leisure, while in AR, slower growth comes from conflicting choices over the tax rate, with a capital poor median voter prevailing. Our results generalize the work of Alesina and Rodrik (1994) and Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the effect of income inequality on the tax rate and labor supply. Second, using the set up of Das and Ghate (2004), we provide a dynamic analysis of Alesina and Rodrik (1994) where majority voting determines the extent of distribution, and thus, a relationship between inequality and growth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth with endogenous leisure is not intractable.
  • Distributive Conflict, Endogenous Distribution, Median Voter Theorem, Endogenous Growth, Positive Political Economy
  • RePEc:esi:egpdis:2006-22
  • This paper constructs a heterogenous agent model of endogenous distribution and growth. When the labor leisure choice of agents is exogenous, the factor holding ratios of households converges to a mass point that is independent of the initial distribution of capital in the steady state. There is complete equality and every household's preferred tax rate equals the growth maximizing tax rate. There is no distributive con.ict in the long run. When the labor leisure choice of households is endogenous, there is also complete convergence in the factor holding ratios of agents in the steady state. However, the tax rate under majority voting is less than the growth maximizing tax rate which leads to distributive con.ict in the long run. These results extend the model of endogenous distribution and growth in Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the e.ect of income inequality on the tax rate and labor supply. Second, the model is solved using a more empirically plausible speci.cation of the government budget constraint in which households vote over the tax rate on capital income instead of a tax on wealth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth is not an intractable proposition.
  • RePEc:diw:diwwpp:dp514
Language
  • English
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