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Redistributive Politics and Government Debt in a Borrowing-constrained Economy
Get PDF* Revised: [11-02, 2011]We develop a two-period, three-class of income model where low-income agentsare borrowing constrained because of capital market imperfections, and where redistributiveexpenditure is financed by tax and government debt. When the degreeof capital market imperfection is high, there is an ends-against-the-middle equilibriumwhere the constrained low-income and the unconstrained high-income agentsfavor low levels of government debt and redistributive expenditure; these agentsform a coalition against the middle. In this equilibrium, the levels of governmentdebt and expenditure might be below the efficient levels, and the spread of incomedistribution results in a lower debt-to-GDP ratio
