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 a¤ects 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 bene...ciaries 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. (JEL: D72, E62, H11, H31, P16). John Hassler, José V. Rodríguez Mora, Kjetil Storesletten, and Fabrizio Zilibotti¤ There is now a growing literature bringing politico-economic aspects into macroeconomics. Rather than treating policies as exogenous instruments in the hands of benevolent policy makers, this recent literature describes government policies as endogenous outcomes collectively determined by rational self-interested individuals. While many important issues are dynamic in nature, technical limitations have, however, so far prevented a thorough investigation of dynamic political choices in macroeconomics. This paper takes a step towards overcoming these di¢culties. In particular, we construct a tractable positive theory of the dynamics of income redistribution where policy is set through repeated voting by forward-looking rational agents, and current policy a¤ects future political outcomes through changes in the distribution of voters. Until now, the literature has resorted to numerical techniques to study this link and our contribution is therefore partly methodological. Equally important, our theory provides insights on salient aspects of the debate on the determinants of redistributive policies (the “welfare state”). First, it predicts that welfare state policies and their e¤ects on distribution are persistent: shocks to the income distribution that would have transitory e¤ects if policies were exogenous may lead to permanent changes in the demand for redistributive policies. These, in turn, a¤ect private investment behavior and the future dynamics of income distribution. Second, it suggests that welfare state institutions are intrinsically fragile, since even political majorities bene...ting from redistribution may want to strategically vote for policies leading to the dismantlement of the welfare state. The latter prediction hinges, in our model, on rational dynamic voting and would be absent if