Public expenditure distribution, voting, and growth

Abstract

In this paper we endogenize public policy with a voting process in a general equilibrium model of overlapping generations. We show that the distribution across sectors of both the public expenditure and the value added evolve together over time. Our model interprets this evidence as a reduced form representation of two structural relations, that is, the dynamic effect of the public expenditure on the future distribution of value added, and the influence of the distribution of vested interests across sectors on current public policy decisions. Since the shifts in the sectoral composition explain a relevant part of TFP growth, the model suggests that the political economy of public policy plays an important role in determining the development path of an economy.