Politico-economic equilibrium and economic growth

Abstract

We propose a notion of dynamic politico-economic equilibrium which builds on two key assumptions: policies are determined sequentially, and agents are fully rational in their roles as both consumers and voters. We examine a simple model of endogenous growth and infinitely-lived agents, where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings. We relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth. We show that our equilibria are time-consistent and we argue that the choice of equilibrium concept might have important quantitative implications.