Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 704: The Survival of the Welfare State

John Hassler (), Jose Mora (), Kjetil Storesletten () and Fabrizio Zilibotti ()
Additional contact information
John Hassler: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Jose Mora: Universitat Pompeu Fabra, Postal: Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, SPAIN
Kjetil Storesletten: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Fabrizio Zilibotti: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

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 fully 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

49 pages, February 12, 2002

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