Transitional Dynamics in a Growth Model with Distributive Politics

This paper constructs a heterogenous agent model of endogenous distribution and growth. When the labor leisure choice of agents is exogenous, the factor holding ratios of households converges to a mass point that is independent of the initial distribution of capital in the steady state. There is complete equality and every household's preferred tax rate equals the growth maximizing tax rate. There is no distributive con.ict in the long run. When the labor leisure choice of households is endogenous, there is also complete convergence in the factor holding ratios of agents in the steady state. However, the tax rate under majority voting is less than the growth maximizing tax rate which leads to distributive con.ict in the long run. These results extend the model of endogenous distribution and growth in Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the e.ect of income inequality on the tax rate and labor supply. Second, the model is solved using a more empirically plausible speci.cation of the government budget constraint in which households vote over the tax rate on capital income instead of a tax on wealth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth is not an intractable proposition.Distributive conflict; Endogenous distribution; Median voter theorem; Endogenous growth

Transitional dynamics in a growth model with distributive politics

This paper constructs a heterogenous agent model of endogenous distribution and growth. When the labor leisure choice of agents is exogenous, the factor holding ratios of households converges to a mass point that is independent of the initial distribution of capital in the steady state. There is complete equality and every household's preferred tax rate equals the growth maximizing tax rate. There is no distributive con.ict in the long run. When the labor leisure choice of households is endogenous, there is also complete convergence in the factor holding ratios of agents in the steady state. This implies that there is unanimity over preferred tax rates as in the previous case, although the preferred tax rate of households is less than the growth maximizing tax rate. We identify the intuition behind this result. Our results also extend the model of endogenous distribution and growth in Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the e.ect of income inequality on the tax rate and labor supply. Second, the model is solved using a more empirically plausible speci.cation of the government budget constraint in which households vote over the tax rate on capital income instead of a tax on wealth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth is not an intractable proposition.Distributive Conflict, Endogenous Distribution, Median Voter Theorem, Endogenous growth

V-Factor: Distribution, timing and correlates of the the great Indian growth turnaround

The ratio of Indian to US per capita output over the past 45 years has displayed a distinctive "V"-shaped pattern. We show that a strikingly similar V-shaped pattern is visible not just in aggregate output figures, but also as the primary determinant of long-term movements in the cross-sectional distribution within the All-India total, at both sectoral and state output levels. We also carry out preliminary investigations of correlates of the "VFactor", using a new panel data set for Indian states from 1960 to 2005 that extends and encompasses all previous datasets relevant to macroeconomic analysis of the Indian states.Principal Components, Convergence, Divergence, Indian states

The "V-Factor": Distribution, Timing and Correlates of the Great Indian Growth Turnaround

The ratio of Indian to US per capita output over the past 45 years has displayed a distinctive "V"-shaped pattern. We show that a strikingly similar V-shaped pattern is visible not just in aggregate output .figures, but also as the primary determinant of long-term movements in the cross-sectional distribution within the All-India total, at both sectoral and state output levels. We also carry out preliminary investigations of correlates of the "V-Factor", using a new panel data set for Indian states from 1960 to 2005 that extends and encompasses all previous datasets relevant to macroeconomic analysis of the Indian states.Principal components, divergence, Indian States

The Welfare State, Thresholds, and Economic Growth

Can a growing welfare state induce a regime switch in the growth rate of an econ-omy? This paper constructs a dynamic political economy model of economic growth and the welfare state in which both variables are non-linearly related and jointly en-dogenous. Using a Markov switching framework over the period 1950-2001, we find that the structural decline in growth rates that several welfare state economies expe-rienced during 1970-1975 are preceded by movements to a high welfare state regime. This suggests that expanding welfare state regimes are associated with low economic growth regimes, while contracting welfare state regimes are associated with high growth regimes. However, we also find that the structural decline in growth rates leads to a downward structural break in the welfare state for many welfare state economies. This suggests that declining growth regimes are associated with contracting welfare state regimes, as lower growth forces politicians to cut the size of the welfare state. We also report strong evidence that both expansion and contractions in the welfare state affects growth non-linearly. These results are able to characterize a predictable and general pattern of welfare state-growth evolution.Welfare state; Structural change; Regime switching models; Positive political economy; Endogenous growth

Endogenous Distribution, Politics and Growth

This paper generalizes the analysis of distributive conflict, politics, and growth developed by by Alesina-Rodrik (1994). We construct a heterogenous-agent framework in which both growth and the distribution of wealth are endogenous. Due to adjustments in the distribution of wealth, the composition of factor ownership across households equalizes in the long run. This implies that the optimal tax rate is the same for all households and equals the growth maximizing tax rate. Hence, there is no distributive conflict in the long run. When the model is augmented with a non-political redistributive policy, the model predicts that long run growth exhibits a negative monotonic relationship with respect to this policy, i.e., a redistributive policy that leads to a more equitable wealth distribution unambiguously reduces growth in the long run.Median Voter, Endogenous Growth, Wealth Distribution, Distributive Conflict, Redistributive Policy.

Endogenous distribution, politics and the growth-equity tradeoff

In comparison to the standard literature on inequality and growth which assumes the former to be exogenous, we formulate a model in which inequality and growth are both endogenous. Furthermore, long-run distribution, at least locally, is shown to be independent of the initial distribution of factor ownership. It is shown that exogenous policy changes that are primarily targeted towards growth and foster less inequality do enhance growth. But those that are primarily redistributive and imply more equal distribution reduce growth. This is consistent with recent empirical work which shows that inequality and growth may be positively related.Median Voter, Endogenous Growth, Wealth Distribution, Distributive Conflict, Redistributive Policy

Growth of Government And The Politics of Fiscal Policy

U.S. government expenditures increased rapidly during the post-war period, then slowed in the 1980s and began falling in 1992. To examine the dynamics of the growth and subsequent reduction in government spending, we present a dynamic general equilibrium model in which politicians choose government spending to maximize support by their constituents. The model predicts that government expenditures will initially mimic Wagner's law - the tendency for government spending to increase with GDP - but eventually diverge from output due to the growth of the welfare state. After government expenditures become large, we identify an endogenous threshold on the economy's growth path where it is optimal for politicians to shrink the welfare sate, cut taxes, and stimulate output growth. We show that the policies chosen by politicians are Pareto suboptimal and cause endogenous cycles in output. Such cycles are of several types, and we characterize when the equilibrium growth path will result in a reduction in the size of the welfare state, as well as when the welfare state cycles between small and large.government expenditures; growth; Wagner's Law; endogenous cycles

Endogenous Growth Through Government Policy

This paper illustrates two reasonable political decision mechanisms by which fiscal policy generates endogenous growth under a constant returns to scale production technology, absent externalities. Based on the dynamics induced by various policy choices, we demonstrate that policies that maximize capital deepening generate balanced growth and are Pareto optimal. In contrast, policies chosen by the median voter produce balanced growth, but are suboptimal.public investment; positive political economy; median voter theorem; endogenous growth

Has India emerged? Business cycle facts from a transitioning economy.

This paper presents a comprehensive set of stylised facts for business cycles in India from 1950 - 2009. We find that the nature of the business cycle has changed dramatically after India's liberalisation reforms in 1991. In particular, after the the mid 1990s, the properties of India's business cycle has moved closer in key respects to select advanced countries. This is consistent with India's structural transformation from a pre-dominantly agricultural and planned developing economy to a more mar- ket based industrial-income economy. We also identify in what respects the behaviour of the Indian business cycle is different from that of other advanced economies, and closer to that of other less developed economies. This is the first exercise of this kind to generate an exhaustive set of stylised facts for India using both annual and quarterly data.Macroeconomics ; Real business cycles ; Emerging market DSGE models ; Volatility and growth