Alesina y rodick

NBER WORKING PAPERS SERIES

DISTRIBUTIVE POLITICS AND ECONOMIC GROWTH

Alberto Alesina

Dani Rodrik

Working Paper No. 3668

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 1991

Alesina's work was supported by a Sloan Foundation Research Fellowship. Rodrik's work was supported by an NBER Olin Fellowship. We thank Naury Obstfeld, RobertoPerotti, Torsten Persson, Richard Zeckhauser and participants in seminars at Boston College, Harvard, University of Pennsylvania and NBER for useful suggestions, and Gerald Cohen and Nazrul Islam for excellent research assistance. This paper is part of NBER's research program in Growth. Any opinions expressed are those of the authors and not those of the National Bureau of Economic
Research.

NBERWorking Paper fl3668
March 1991

DISTRIBUTIVE POLITICS AND ECONOMIC GROWTH ABSTRACT

This paper studies the relationship between political
conflict and economic growth in a simple model of endogenous

growth with distributive conflicts. We study both the case of
two llclassesfl (workers and capitalists) and the case of a

continuum distribution of agents, characterized by differentcapital/labor shares. We establish several results concerning
the relationship between the political influence of the two groups and the level of taxation, public investment,

redistribution of income and growth. For example, it is shown
that policies which maximize growth are optimal only for a

government that cares only about the capitalists."

Also, we

show that in a democracy (wherethe "median voter theorem' applies) the rate of taxation is higher and the rate of growth lower, the more unequal is the distribution of wealth
We

present empirical results consistent with these implications of
the model.

Alberto Alesina Harvard University NBER and CEPR

Dani Rodrik Harvard University NEER and CEPR

I.

Introduction

This paper analyzes a simple model ofendogenous growth with distributive conflicts
between labor and capital. The rate of economic growth is determined by policy decisions which

are shaped by the stniggle for distributive shares: we endogenize government policy in a model of endogenous growth.

We focus on the political conflict between individuals who derive their income from
capital and those who derive their income from labor. Thegovernment has two decisions to

make: (i) the rate at which capital is to be taxed; and (ii) the distribution of government
expenditures between productive public investments and lump-sum transfers to workers.
Holding the composition of public expenditure constant, the economy's growth rate is increasing

in taxes on capital for "small" tax rates, and decreasing in taxes for "large' rates.Thus, a
strictly positive tax rate on capital maximizes the economy's growth rate. On the other hand,
holding the tax rate constant, growth is reduced by an increase in redistribution through transfers

to workers, who supply labor inelastically.
We show how these public finance decisions (and therefore growth rates) are determined

in two types of political models. In the first we considera government which attributes certain

weights to the welfare of two groups in the population, workers and capitalists. We can think

of these weights as being determined by the lobbying or other political activities of the two
groups. In addition to providing a simple, tractable model in which the growth consequences of distributional conflicts can be analyzed, this framework also leads toseveral results. First,
we find that maximizing the economy's growth rate is the optimal policy only for a government
that cares only about capitalists. A government that attributes some positive weight (no riiatter

2

how small) to workers' welfare would always choose a growth rate that fails short of the
maximum attainable. Workers always prefer a lower growth rate than capitalists,...