Paper #603

Title:

The survival of the welfare state

Authors:

John Hassler, José V. Rodríguez Mora, Kjetil Storesletten and Fabrizio Zilibotti

Date:

December 2001

Abstract:

This paper provides an analytical characterization of Markov perfect equilibria in a politico-economic model with repeated voting, where agents vote over distortionary income redistribution. The key feature of the theory is that the future constituency of redistributive policies depends positively on the current level of redistribution, since this affects both private investments and the future distribution of voters. Agents vote rationally and fullly anticipate the effects of their political choice on both private incentives and future voting outcomes. The model features multiple equilibria. In "pro-welfare" equilibria, both welfare state policies and their effects on distribution persist forever. In "anti-welfare equilibria", even a majority of beneficiaries of redistributive policies vote strategically so as to induce the formation of a future majority that will vote for zero redistribution.

Keywords:

repeated voting, Markov equilibrium, multiple equilibria, welfare state, redistribution, political economy, policy persistence, wage inequality, education

JEL codes:

D72, E62, H11, H31, P16

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Review, 93 (2003), 1, pp. 87-112

Download the paper in PDF format