DP2905 The Survival of the Welfare State

Author(s): John Hassler , José V Rodríguez Mora , Kjetil Storesletten , Fabrizio Zilibotti

Publication Date: August 2001

Keyword(s): repeated voting , markov equilibrium , multiple equilibria , welfare state , redistribution , policy-behaviour complementarity , wage inequality , education

JEL(s): D72 , E62 , H11 , H31 , P16

Programme Areas: International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP2905.asp

This Paper provides an analytical characterization of Markov perfect equilibria in a model with repeated majority voting, where agents vote over income redistribution. The key feature of the theory is that the future constituency of redistributive policies depends positively on the current level of redistribution, since this affects both private investments and the future distribution of voters. Agents vote rationally, and fully anticipate the effects of their political choice on both private incentives and future voting outcomes. The equilibrium features multiple steady-states, one with and one without a welfare state. The theory can explain why welfare state institutions, originally introduced in response to specific shocks (e.g., the Great Depression), have been so persistent.