Staff Report 234

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On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model

Per Krusell
José-Víctor Ríos-Rull - Consultant

Published July 1, 1997

Abstract
We study a dynamic version of Meltzer and Richard’s median-voter analysis of the size of government. Taxes are proportional to total income, and they are used for government consumption, which is exogenous, and for lump-sum transfers, whose size is chosen by electoral vote. Votes take place sequentially over time, and each agent votes for the policy that maximizes his equilibrium utility. We calibrate the model and its income and wealth distribution to match postwar U.S. data. This allows a quantitative assessment of the equilibrium costs of redistribution, which involves distortions to the labor-leisure and consumption-savings choices, and of its benefits for the decisive voter. We find that the total size of transfers predicted by our political-economy model is quite close to the size of transfers in the data.


Published In: American Economic Review (Vol. 89, No. 5, December 1999, pp. 1156-1181)

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