Transfers versus Public Investment: The Politics of Intergenerational Redistribution and Growth

In this paper we analyze tax and transfer choices in an OLG economy with capital accumulation and endogenous growth coming from public investment, such as education. We solve for a Markov perfect equilibrium when electoral competition targets the votes of young and old households. We find that when calibrating the model to match US data, it predicts levels of intergenerational transfers and of public investments that are similar to the observed ones. Furthermore the Ramsey policy for the same parameters would call for both generations to be taxed to finance public investment. If the political process internalized the benefits that public investment has on future generations, growth would be twice as high as currently observed