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The Political Economy of Social Security in a Borrowing‐Constrained Economy
Author(s) -
ARAWATARI RYO,
ONO TETSUO
Publication year - 2013
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12030
Subject(s) - economics , social security , overlapping generations model , consumption (sociology) , tax rate , voting , majority rule , labour economics , wage , general equilibrium theory , microeconomics , politics , macroeconomics , market economy , social science , artificial intelligence , sociology , political science , computer science , law
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.