The Dynamics of Inequality and Social Security in General Equilibrium
Zheng Michael Song
Fudan University - School of Economics
March 24, 2009
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 a 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.
Number of Pages in PDF File: 42
Keywords: inequality, intra-generational redistribution, Markov perfect equilibrium, probabilistic voting, social security
JEL Classification: E21, E62, H21, H55
Date posted: March 24, 2009
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