Memorandum,
Oslo University, Department of Economics

Abstract: This paper presents a dynamic politico-economic theory of fiscal policy to explain the simultaneous existence of public education and pensions in modern democracies. The driving force of the model is the intergenerational conflict over the allocation of the public budget. Successive generations of voters choose fiscal policies through repeated elections. The political power of elderly voters creates the motive for adults to support public investment in the human capital of future generations, since it expands future pension possibilities. We characterize the Markov perfect equilibrium of the voting game in a small open economy. The equilibrium can reproduce qualitative and quantitative features of intergenerational fiscal policies in modern economies.

Keywords: Intergenerational conflict; Markov perfect equilibrium; pension; public education; repeated voting; small open economy

JEL-codes: D72; E62; H23; H30; H53

47 pages, January 30, 2015

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Published as

Francesco Lancia and Alessia Russo, (2016), 'Public Education and Pensions in Democracy: A Political Economy Theory', Journal of the European Economic Association, vol 14, no 5, pages 35

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