Abstract
We build a multi-dimensional model of political decision-making with endogenous political parties to analyse the effect of inequality and demography on public spending. Voters differ in terms of income and age. Political competition determines in equilibrium the tax rate and the allocation of revenue between income redistribution and two forms of public spending—a capital good and a neutral good. All agents value the neutral good equally but the young like capital spending more than the old do. We show that the effect of age (resp., inequality) on equilibrium public spending can go in any direction based on the underlying level of inequality (resp., age). Our findings reconcile a large body of seemingly contradictory stylised empirical findings in public economics.
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A previous version of this paper was circulated with the title “Age, Inequality and the Public Provision of Healthcare”. The author is grateful for feedback from Jan Auerbach, Abhinash Borah, Sabyasachi Das, Dyotona Dasgupta, Maria Garcia-Alonso, Tapas Kundu, Alessia Russo, Avner Seror, Zaki Wahhaj, Leeat Yariv and various members of the Development Economics Research Centre at the University of Kent (DeReCK), participants at the Delhi Political Economy Workshop Series 2021 (Ashoka University), the SAET Annual Conference (2021), the EDI Brunel University Annual Conference 2022, Oslo Metropolitan University, the 17th Annual Conference on Economic Growth and Development (Indian Statistical Institute, Delhi, 2022), the 6th PEDD conference (University of Münster, 2023), the 4th International Conference on Economic Theory and Policy (Presidency University, Calcutta, 2023), and two anonymous referees. The usual disclaimer applies.
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Mitra, A. The public provision of goods in democracies: Do age and inequality matter?. Econ Theory (2024). https://doi.org/10.1007/s00199-024-01572-x
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DOI: https://doi.org/10.1007/s00199-024-01572-x