a solution concept for majority rule in dynamic settings we define and explore the notion of a dynamic condorcet winner dcw which extends the notion of a condorcet winner to dynamic settings we show that for every dcw every member of a large class of dynamic majoritarian games has an equivalent equilibrium and that other equilibria are not similarly portable across this class of games existence of dcws is guaranteed when members of the community are sufficiently patient we characterize sustainable and unsustainable outcomes study the effects of changes in the discount factor investigate efficiency properties and explore the potential for achieving renegotiation proof outcomes we apply this solution concept to a standard one dimensional choice problem wherein agents have single peaked preferences as well as to one involving the division of a fixed aggregate payoff

common agency and coordination general theory and application to government policy making we develop a model of common agency with complete information and general preferences with nontransferable utility and we prove that the principals nash equilibrium in truthful strategies implements an efficient action we apply this theory to the construction of a positive model of public finance where organized special interests can lobby the government for consumer and producer taxes or subsidies and targeted lump sum taxes or transfers the lobbies use only the nondistorting transfers in their noncooperative equilibrium but their intergroup competition for transfers turns into a prisoners dilemma in which the government captures all the gain that is potentially available to the parties

a median voter model of social security this paper presents a theoretical median voter analysis of the determination of the level of social security the framework for the analysis is a continuous time overlapping generations model with nonaltruistic households facing borrowing constraints in the capital market a majority voting equilibrium is shown to exist in which the median voter is liquidity constrained the desired level of social security for each voter is a declining function of the preexisting level of social security as a consequence in a sequence of votes on social security beginning with a zero level the program initially overshoots its steady state value copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

durable goods monopolists durable goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist to the extent the monopolist is able to rent his product rather than sell it or to make binding promises about his future production such problems are ameliorated given the inability to do the above the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns a reverse averch johnson result that monopolist sellers may invest less in fixed costs including plant modernization and research and development than would the renters is shown it is also shown that even though sellers have less monopoly power than renters and nondurable goods monopolists it is possible that the seller will cause a greater deadweight loss than the other types of monopolies

intergenerational redistribution with short lived governments we study the politics of intergenerational redistribution in an overlapping generations model with short lived governments the successive governments who care about the welfare of the currently living generations and possibly about campaign contributions are unable to pre commit the future course of redistributive taxation in a stationary politico economic equilibrium the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled we find that there exist multiple stationary equilibria in many political settings steady state welfare is often lower than it would be in the absence of redistributive politics

why would a durable good monopolist also produce a cost inefficient nondurable good abstract we develop both commitment and time consistent stationary policies for a monopolist who produces a mixture of goods distinguished by production costs and degree of durability under commitment only the cost efficient durable good is produced and the monopoly output is realized each period for the time consistent stationary case there is an interval for the degree of durability where only the durable good is produced and a higher non overlapping interval where both the cost efficient durable and the cost inefficient nondurable good are produced for any period length when the degree of durability is such that both durable and nondurable goods are provided combined output is less than the competitive output and decreases in the degree of durability approaching the single period monopoly output when both goods are produced the coase conjecture does not hold

spending cuts or tax increases the composition of fiscal adjustments as a signal abstract this paper shows that the composition of fiscal adjustments spending cuts versus tax increases serves as a signal of the government s degree of collusion with special interests the politico economic model of fiscal policies combining retrospective voting with common agency type lobbying presents undominated separating equilibria and intuitive pooling ones in both of which fiscal adjustments with sufficiently large spending cuts lead to incumbent reappointment whereas those with only tax increases lead to incumbent defeat these findings are consistent with the recent empirical evidence of voters behaving as fiscal conservatives the efficiency enhancing aspects of the signaling mechanism and the effects of imposing a deficit limit are also analyzed

can democracy induce development a constitutional perspective we examine the constitutional design required for democratic societies to overcome poverty traps restricting agenda setting by ensuring subsistence levels of consumption and applying simple majority voting as a decision rule will not enable a society to overcome poverty we show that a combination of suitable constitutional rules can however overcome poverty and induce economic well being besides majority voting these rules include rotating agenda setting agenda repetition and tax protection rules we thus highlight the crucial role of democratic institutions for economic development

voting on pensions a survey abstract the paper presents a nonexhaustive survey of the literature designed to explain emergence size and political sustainability of pay as you go pension systems it proposes a simple framework of analysis a small open two overlapping generation economy model around which some variants are displayed dictatorship of the median voter is assumed the text is organized to answer the following questions i do political equilibria with payg pension schemes exist ii why do they emerge iii what are the conditions for the participation constraint of the pension game to be verified and finally iv what is the size of the pension system chosen by the median voter and how is this size influenced by an exogenous e g demographic shock

oligopolies and product durability abstract we analyze a simple two period quantity setting model where firms rent all of their output we compare the durability chosen by an oligopolist to the competitive socially optimal durability the model shows in subgame perfect equilibria the durability chosen by oligopolists will be cost minimizing independent of their output levels thus swan s independence result can be extended to oligopoly markets if the firms rent their output we also demonstrate the independence result can be extended to certain corner solutions

optimal dynamic durability abstract consider a firm that adjusts its production and the choice of durability for its products instantaneously we show that when the marginal cost with the respect to durability is nonincreasing a the optimal durability for both the competitive firm and the monopolist decreases over time and b the monopolist will produce a good with lower durability than the competitive firm we thus lend support for empirical findings and causal observations that found the phenomenon of declining durability over time

politico economic equilibrium and economic growth abstract we propose a notion of dynamic politico economic equilibrium which builds on two key assumptions policies are determined sequentially and agents are fully rational in their roles as both consumers and voters we examine a simple model of endogenous growth and infinitely lived agents where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings we relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth we show that our equilibria are time consistent and we argue that the choice of equilibrium concept might have important quantitative implications

emissions taxation in durable goods oligopoly this paper examines the use of taxation to control external damage due to pollution when product durability is endogenously determined a special form of the emissions function is also examined which is equivalent to an excise tax on output the dynamic oligopoly model indicates that many conventional results in the durability and taxation literature need not hold when durability is endogenously determined in particular the analysis shows durability may not be independent of industry structure nor will firms minimize their manufacturing costs of providing service in addition the second best tax on imperfectly competitive firms is not necessarily less than the tax on a competitive firm when firms choose their product s durability

learning by doing and product durability many durable goods industries are industries that have significant learning affects i examine a monopolist s and social planner s cost minimizing durability choice in both the short and the long run when learning effects are present the model indicates that the relationship between durability and learning depends crucially upon whether or not knowledge decays and on learning s impact on the marginal cost of durability in particular this model demonstrates that swan s 1970 1971 independence result will hold in the long run if knowledge does not decay but will not hold if knowledge does decay thus whether or not monopolists will manufacture products with the same durability or quality as a social planner depends to a large extent on the type of learning process in the industry and on whether or not quality and durability directly influence this learning process

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

an economic theory of planned obsolescence planned obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases however rational customers will pay for only the present value of the future services of a product therefore profit maximization seemingly implies producing any given flow of services as cheaply as possible with production involving efficient useful lives this paper shows why this analysis is incomplete and therefore incorrect monopolists are shown to desire uneconomically short useful lives for their goods oligopolists have the monopolist s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability however oligopolists can generally gain by colluding to reduce durability and increase rentals relative to sales some evidence is presented that appears to be generally consistent with the predictions of the theory

market structure and the durability of goods a basic proposition in microeconomics is that a monopolist tends to produce less output than would be produced by a competitive industry with this proposition in mind it is tempting to suggest that monopolistic producers of durable goods will produce goods with less durability than would be produced by a competitive industry this result was derived by martin 1962 kleiman and ophir 1966 levhari and srinivasan 1969 and schmalensee 1970 however swan 1970 showed that monopolists would choose the same degree of durability for their goods as would competitive producers the reason that earlier writers had reached a different result was that they had focused on long run equilibrium profits and ignored the role of initial conditions in optimizing decisions the swan independence result that durability is independent of market structurewas first derived under the assumption of constant returns to scale specifically the average cost of production was assumed to be an increasing function of durability but independent of the level of output the constant returns to scale assumption was first relaxed by sieper and swan 1973 by introducing a fixed capacity cost they showed that with finitely lived capacity which required replacement the independence result continued to hold in the very long run although market structure could affect durability before attainment of long run equilibrium no systematic results were derived kamien and schwartz 1974 introduced rising average cost curves and resurrected the result of earlier writers that a monopolist would choose a lower durability than competitive firms however swan 1977 pointed out that the kamien schwartz analysis is flawed by not allowing the monopolist access to the same technology as the competitive industry if the monopolist is allowed to choose the optimal number of plants then swan s independence result holds finally auernheimer and saving 1977 introduced costs of adjusting the rate of output and the durability of output they showed that if long run increasing costs arise from pecuniary external diseconomies then the independence result is preserved as remarked by schmalensee 1979 in his survey the general message of

durability choice under demand uncertainty this paper examines the impact of demand uncertainty on a monopolist s durability choice within a simple two period framework the analysis shows that the firm will produce the socially optimal durability if its output is rented and demand uncertainty is small but that it may produce units with inefficiently short life spans if output is sold however the model reveals that this planned obsolescence may be reduced from certainty levels depending upon the impact of uncertainty on future demand thus uncertainty may actually increase the firm s product durability relative to certainty levels

the dynamic adjustment of optimal durability and quality they don t make them like they used to is a well known adage which is investigated in this paper we show that when the marginal cost with respect to durability or quality per unit of production does not increase with production then a a competitive firm and a monopolist will choose an optimal durability or quality path that decreases over time b the more likely it is that quality and quantity are substitutes either in consumption or production the more likely it is that quality will deteriorate over time as the market approaches the steady state c substitutability of quality and durability will tend to drive quality down even faster when durability declines

political intergenerational risk sharing abstract in a stochastic two period olg model featuring an aggregate shock to the economy ex ante optimality requires intergenerational risk sharing we compare the level of intergenerational risk sharing chosen by a benevolent government and by an office seeking politician in our political system the transfer of resources across generations is determined as a markov equilibrium of a probabilistic voting game low realized returns on the risky asset induce politicians to compensate the old through a payg system this political system typically generates an intergenerational risk sharing scheme that is i larger ii more persistent and iii less responsive to the realization of the shock than the social optimum this is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers and hence overspends

the composition of government expenditure economic conditions and preferences i introduction there are substantial variations among countries in their tax and expenditure policies even among developed democracies sharing similar economic and political regimes as discussed by tanzi 2000 and alesina and glaeser 2004 this study examines the question of why expenditure patterns differ among democratic countries using a sample of countries with a high democracy index section ii presents empirical evidence showing that the united states has a low ratio of expenditure on transfer payments to that on public goods despite its high income inequality scandinavian countries typically combine low inequality and much higher expenditure on transfer payments relative to public goods british commonwealth countries have higher income inequality than scandinavian countries and yet a lower ratio of transfer payments to public goods expenditure these findings seem inconsistent with the prediction of a large theoretical literature more basic income inequality leads to a larger extent of redistributive expenditure 1 however the observed partial relationship between the expenditure composition and income inequality is possibly obscured by many other factors reflecting differences in economic and demographic conditions or cultural differences across countries see lind 2005 and alesina and glaeser 2004 in order to attempt to understand the way in which cultural factors and economic conditions may combine to influence the composition of expenditure this paper examines the division of expenditure between public goods and a transfer payment under majority voting in the context of an overlapping generations model by taking a growth context and focusing on the expenditure composition for a given tax rate the model allows for a range of factors which may contribute to cross country variations in expenditure compositions such as income and population growth rates and the discount factor in particular cultural factors are captured by a parameter in the utility function reflecting individuals preference for public goods relative to private goods consumption direct independent evidence regarding preferences for public goods is extremely difficult to obtain in view of well known problems of preference revelation mechanisms a wide range of studies however take such differences as their starting point see for example haufler 1996 the transfer payment in the model is referred to as a pension as it is received in the second period of life 2 however it may be thought of more broadly as a standard type of income transfer as it involves in the present overlapping generations framework a decision regarding income shifting between periods within the life cycle as well as intra and intergenerational redistribution members of each cohort are considered to vote on their desired pension during the retirement period on the understanding that during the working period each cohort finances the expenditure previously agreed by the preceding cohort and voters are aware of the nature of the government budget constraint therefore there is a social contract in which each generation in the retirement period is able to benefit from the income and population growth of the following generation the condition under which the social contract is supported by a majority of the members of any cohort involves extending the condition obtained by aaron 1966 and samuelson 1958 the model yields a closed form solution for the majority choice of the expenditure ratio defined as the ratio of transfer payments to public goods expenditure consistent with previous theoretical literature the model predicts a positive relationship between income inequality and the expenditure ratio a numerical exercise is then implemented to examine the sensitivity of the expenditure ratio to variations in model primitives where baseline parameter values are calibrated to the dataset for a group of democratic countries

positive arithmetic of the welfare state abstract this paper argues that social security enjoys wider political support than other welfare programs because i retirees constitute the most homogeneous voting group and ii the intragenerational redistribution component of social security induces low income young to support this system in a dynamically efficient overlapping generation economy with earnings heterogeneity we show that for sufficient income inequality and enough elderly in the population a welfare system composed of a within cohort redistribution scheme and an unfunded social security system represents the political equilibrium of a two dimensional majoritarian election social security is sustained by retirees and low income young while intragenerational redistribution by low income young unlike unidimensional voting model our model suggests that to assess how changes in inequality affect the welfare state the income distribution should be decomposed by age groups

the survival of the welfare state this paper provides an analytical characterization of markov perfect equilibria in a model with repeated voting where agents vote over distortionary income redistribution a key result is that the future constituency for redistributive policies depends positively on current redistribution since this affects both private investments and the future distribution of voters the model features multiple equilibria in some equilibria positive redistribution persists forever in other equilibria even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period skill biased technical change makes the survival of the welfare state less likely

intergenerational altruism with future bias abstract we show that standard preferences of altruistic overlapping generations exhibit future bias which involves preference reversals associated with increasing impatience this underlies a conflict of interest between successive generations we explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments representing living generations and choosing policies independently over time we argue that future bias creates incentives to legislate and sustain a pay as you go pension system which every government views as a self enforcing commitment mechanism to increase future old age transfers

exploring the links between equity and efficiency in payments for environmental services a conceptual approach this paper addresses the relationship between equity and efficiency in pes schemes from a conceptual point of view emphasis is placed on the role of the institutional setting social perceptions about economic fairness or distributive justice of the payments uncertainty and interactions between agents including power relations we introduce the heuristic concept of the efficiency equity interdependency curve to illustrate potential combinations between equity and efficiency that may be theoretically possible the paper argues that different types of institutional factors determine which equity efficiency combinations may be potentially feasible influence the actual combination that will be achieved on the ground and condition possible changes in that combination due to exogenous factors by stressing the role of institutional aspects in shaping the equity efficiency relationship the paper attempts to go beyond the dominant coasean vision of pes

the future of social security we analyze the effect of the projected demographic transition on the political support for social security and equilibrium outcomes embedding a probabilistic voting setup of electoral competition in the standard olg model with capital accumulation we find that intergenerational transfers arise in the absence of altruism commitment or trigger strategies closed form solutions predict population ageing to lead to higher social security tax rates a rising share of pensions in gdp but eventually lower social security benefits per retiree the response of equilibrium tax rates to demographic shocks reduces old age consumption risk calibrated to match features of the u s economy the model suggests that in response to the projected demographic transition social security tax rates will gradually increase to 16 other policies that distort labor supply will become less important labor supply therefore will rise in contrast with frequently voiced fears

on the size of u s government political economy in the neoclassical growth model we study a dynamic version of meltzer and richard s median voter model of the size of government taxes are proportional to total income and they are redistributed as equal lump sum transfers voting takes place periodically over time and each consumer votes for the tax rate that maximizes his equilibrium utility we calibrate the model to u s data key elements in the calibration are the income and wealth distribution and the parameters governing the leisure and consumption choices the total size of transfers predicted by our political economy model is quite close to the size of transfers in the data

special interests and technological change we model an olg economy where productivity growth comes from two alternative sources process innovation and learning by doing there is a trade off between the two in so far as frequent technological updates reduce the scope for learning on existing technologies a conflict is shown to arise between the young and the old because the former favor innovation while the latter prefer learning we model the interaction between different generations and short lived policy makers as a dynamic common agency problem where competing generations invest a certain amount of resources to lobby either for the maintainance of the current technology or the adoption of a new one by focusing on truthful markov perfect equilibria we characterize the political equilibrium and show its dependence on the underlying technological parameters

electoral competition and special interest politics have fixed positions on some issues but vary their positions on others in order to attract votes and campaign contributions in this context we examine whether special interest groups are governed by an electoral motive or an influence in their campaign giving and how their contributions affect the equilibrium platforms we show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups the party that is expected to win a majority of seats caters more to the special interests

a second chance at success a political economy perspective abstract this paper characterizes a stationary markov perfect political equilibrium where agents vote over income taxation that distorts educational investment agents become rich or poor through educational investment and the poor have a second chance at success the results show the following concerning the cost of a second chance first when the cost is low the economy is characterized by high levels of upward mobility and inequality and a low tax burden supported by the poor with prospects for upward mobility second when the cost is high there are multiple equilibria with various patterns of upward mobility inequality and redistribution numerical examples show that the shift from a high cost economy to a low cost economy may reduce social welfare

antisocial security the puzzle of beggar thy children policies the u s social security program has irrevocably transferred substantial wealth from workers to their ostensibly altruistic parents after some alternative explanations for this paradox are addressed a formal model is developed to show that a majority of rational voters who care about their descendants can support the preservation of current benefits for themselves but accept the prospect of social security s future retrenchment incorporating elements of tabellini s 2000 positive theory of social security and benabou and ok s 2001 analysis of income mobility the model identifies specific forces affecting this time varying individual support for social security these forces are embodied in three hypotheses related to income mobility relative income level and age an ordered logit analysis of cumulative anes data supports these hypotheses

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

electoral competition with informed and uninformed voters i present a model of electoral competition in which candidates raise campaign contributions by choosing policies that benefit interest groups and then expend those contributions to influence voters who are uninformed about the policies informed voters however vote based on those policies so candidates face a trade off between choosing a policy to generate funds to attract the uninformed vote and choosing a policy to attract the informed vote electoral equilibria are characterized for two categories of policies particularistic and collective in the case of particularistic policies the equilibrium policies of the candidates are separated if the proportion of uninformed voters is sufficiently high and the degree of separation is an increasing function of that proportion the model is extended to include the public financing of elections and incumbency advantages for the case of collective policies the candidates locate at the median of the ideal points of the informed voters and contributions are zero

public education and pensions in democracy a political economy theory a dynamic political economy theory of scal policy is presented to explain the simultaneous existence of public education and pensions in modern democracies the driving force of the model is the intergenerational conict over the allocation of the public budget successive generations of voters choose scal 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 reproduces salient features of intergenerational