The authors would like to thank two anonymous referees for their helpful comments and suggestions. A former version of this paper was circulated under the title “The political economy of social security and public goods provision in a borrowing-constrained economy.” Arawatari acknowledges financial support of the Japan Society for the Promotion of Science (JSPS) through a Grant-in-Aid for Young Scientists (Start-up) (No. 21830046). Ono acknowledges the financial support of the Japan Society for the Promotion of Science (JSPS) through a Grant-in-Aid for Young Scientists (B) (No. 20730208).
The Political Economy of Social Security in a Borrowing-Constrained Economy
Version of Record online: 2 MAY 2013
© 2013 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 15, Issue 3, pages 448–476, June 2013
How to Cite
ARAWATARI, R. and ONO, T. (2013), The Political Economy of Social Security in a Borrowing-Constrained Economy. Journal of Public Economic Theory, 15: 448–476. doi: 10.1111/jpet.12030
- Issue online: 2 MAY 2013
- Version of Record online: 2 MAY 2013
- Accepted manuscript online: 19 FEB 2013 08:32AM EST
- Manuscript Accepted: 12 JUL 2011
- Manuscript Received: 21 AUG 2010
- Japan Society for the Promotion of Science (JSPS). Grant Numbers: 21830046, 20730208
This paper introduces a three-income class, overlapping-generations model with borrowing constraints. The labor income tax for financing pay-as-you-go social security is determined in a majoritarian voting game played by successive generations. When the interest-rate elasticity of consumption is low, the political equilibrium might be characterized by an equilibrium where the old and the middle-income young individuals form a coalition in favor of a higher tax rate and greater social security, while the low- and the high-income young individuals favor a lower tax rate and less social security. In this equilibrium, the size of social security is decreased by the mean-preserving reduction of a decisive voter's wage if he/she is borrowing-constrained.