DISTRIBUTIONAL CONFLICT, POLITICAL CYCLES AND GROWTH

Abstract

This paper discusses the emergence of endogenous redistributive cycles in a stochastic growth model with incomplete asset markets and heterogeneous agents who vote on the degree of progressivity in the tax-transfer scheme. The model draws from Benabou (in B. S. Bernanke and J. J. Rotemberg (eds), NBER Macroeconomics Annual, Vol. 11, Cambridge, MA, MIT Press, pp. 11–74) and ties the bias in the distribution of political power to the degree of inequality in the society, thereby triggering redistributive cycles which then give rise to a nonlinear, cyclical pattern of savings rates, growth and inequality over time.