Fiscal policies, optimal growth, and elections under different economic systems

Citation

Lian, Peng (1993) Fiscal policies, optimal growth, and elections under different economic systems. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/4ear-vt60. https://resolver.caltech.edu/CaltechTHESIS:11132012-114140098

Abstract

Using a general equilibrium approach, I develop a two-period model that provides microeconomic foundations for the relationship among fiscal policies, optimal growth, and elections under two different economic systems: a free economy and a democratic planned economy.

In a free economy (Chapter 2), I assume the government indirectly controls the economy by selecting a fiscal policy, and a firm chooses the growth path. First, I show that fiscal policy determines the endogenous growth of the economy, and fiscal policy is determined by the distribution of income. Second, ceteris paribus, the wealthier are more likely to oppose a larger government and a redistribution-oriented fiscal policy. Third, I show that binary voting procedures always generate the median-income consumer as the majority winner. Fourth, when a private good utility has a constant elasticity of marginal utility of income. then (a) fiscal policy and income distribution have no effects on economic growth; (b) among different distributions of income, the higher the profit share of the decisive consumer (i.e., median-income consumer), the lower the tax rate; (c) under certain conditions, the inverted-U curve relationship between economic development and income inequality (the Kuznets Curve) does not exist.

In a democratic planned economy (Chapter 3), I assume the government controls the economy by setting wage rates, prices and the growth rate of the economy. First, I show that there exist voting equilibria which are sensitive to agenda setting in most cases. Second, I show that with Cobb-Douglas production technology, decentralization of wage decisions in a democratic planned economy can guarantee a unique political-economic equilibrium and a growth path that is middle-class-oriented. Third, when utility satisfies certain conditions, a democratic planned economy can experience the same growth path and income-distributional neutrality on growth as that of a free economy.

Cross-country and cross-time empirical evidence (Chapter 4) are provided to test theoretical predictions and raise questions for future theoretical explanation. In particular, I find that the growth rate of the population and the ratio of gross private investment to GDP have significantly negative and positive effects on economic growth, respectively.

Thesis Files