Modern governments often use their fiscal authority to transfer income between different groups in society. While sometimes their goals are to further their society’s sense of distributive justice, more often the transfers serve the political ends of the elected representatives and the economic ends of certain constituents. Accordingly, the distribution of income has come to be seen as an outgrowth of the political process and its prevailing institutions. Most existing studies of redistributive politics are cast in the context of a static political competition. In Discussion Paper No. 1396, Research Fellows Gene Grossman and Elhanan Helpman study the politics of intergenerational redistribution in a two-period overlapping generations model with short-lived governments and special-interest groups making political campaign contributions.

They find that when governments are unable to commit to a course of future redistributive policies, the governments will find it difficult to guarantee a high standard of living to their young supporters. If today’s politicians suspect that transfers to the young will be undone by tomorrow’s rulers, then they will be tempted to cater instead to the old. When the political process does give extra weight to the old, the benefits they capture will come at the expense of savings by the young. If that happens, the economy will either have a smaller capital stock or a slower growth rate in the long run than it would in the absence of intergenerational redistribution. Economic well-being can fall hostage to political expectations. The presence of a lobby group making political contributions in support of its members’ special interest may generate a steady-state equilibrium with a low level of consumption in every period. Lastly, competition between generational interest groups can be very intense and cause much of the economy’s output to be wasted in the political process.

Intergenerational Redistribution with Short-lived Governments
Gene M Grossman and Elhanan Helpman