Political Rivalry Effects on Human Capital Accumulation and Inequality: A New Political Economy Approach

Abstract

We propose an endogenous growth model with new political economy elements in order to (1) examine how political incentives affect economic allocations and (2) study the effects of political rivalry on human capital accumulation and income inequality. Focusing on two important policies affecting economic performance—fiscal policy and public investments in human capital accumulation—we find that different political incentives have distinct effects on policies and economic allocations. We also find that political rivalry increases income inequality and reduces economic growth and human capital accumulation through its negative impact on public investments in education, wages and individual learning choice.

Optimal policies, middle class development and human capital accumulation under elite rivalry

“…First, given that 0 < α•Υt 1+Υt < 1, the optimal tax rate set in elite rivalry conditions is strictly higher than the optimal tax rate without elite rivalry, τ = 1 − α. This by itself is not a new result, as the same was veried in Acemoglu (2006) and Sochirca et al (2017). The intuition for this is simple and is related to the fact that the elite will tax above the economically ecient level of 1 − α in order to weaken the middle class and increase the probability of remaining in power.…”

“…In this work we develop a dynamic model with endogenously determined human capital accumulation, demographic changes and policy choices, building on Acemoglu (2009) and Sochirca et al (2017). Our main objective is to analyse the interactions between the optimal policies implemented by the elite, the development of the middle class and human capital accumulation driving the process of economic growth, in the presence of elite rivalry.…”

“…In this extended model, production, wages, human capital accumulation and the optimal policy choices of the elite are determined endogenously. Contrarily to Sochirca et al (2017), in this model we also endogeneize the size of the middle class. Both unskilled workers and the middle class are considered to compose the total labour force producing the nal good.…”

“…Regarded as a negative form of political competition, elite rivalry is generally associated to (both economic and political) competition for power between the political elite and other political groups, aimed at keeping the rulling elite in oce and in control for as long as possible. In this case, policy choices are determined by the goals pursued by the political elite and not by the general interest or by economic eciency considerations, compromising long-term investments and leading to poor aggregate economic performance (see, for example, Alesina & Rodrik, 1992, Alesina & Perotti, 1994, Dixit & Londregan, 1995, Acemoglu & Robinson, 2006, Acemoglu, 2006, Sochirca et al, 2017.…”

“…The main features of the model are based on both previous theoretical research and recent empirical evidence on the relationship between institutions, middle class and economic growth. The analytical framework builds on the model in Sochirca et al (2017), in which elite rivalry translates into excessive increases in the tax rate (as in, e.g., Acemoglu, 2006Acemoglu, , 2009. In the present model, we enrich the setup by specically considering that changes in demographic structure are endogenously determined.…”