Using a general equilibrium approach, I develop a two-period model that providesmicroeconomic foundations for the relationship among fiscal policies,optimal growth, and elections under two different economic systems: a freeeconomy and a democratic planned economy.
In a free economy (Chapter 2), I assume the government indirectly controlsthe economy by selecting a fiscal policy, and a firm chooses the growthpath. First, I show that fiscal policy determines the endogenous growth ofthe economy, and fiscal policy is determined by the distribution of income.Second, ceteris paribus, the wealthier are more likely to oppose a larger governmentand a redistribution-oriented fiscal policy. Third, I show that binaryvoting procedures always generate the median-income consumer as the majoritywinner. Fourth, when a private good utility has a constant elasticity ofmarginal utility of income. then (a) fiscal policy and income distribution haveno effects on economic growth; (b) among different distributions of income,the higher the profit share of the decisive consumer (i.e., median-income consumer),the lower the tax rate; (c) under certain conditions, the inverted-Ucurve relationship between economic development and income inequality (theKuznets Curve) does not exist.
In a democratic planned economy (Chapter 3), I assume the governmentcontrols the economy by setting wage rates, prices and the growth rate of theeconomy. First, I show that there exist voting equilibria which are sensitiveto agenda setting in most cases. Second, I show that with Cobb-Douglasproduction technology, decentralization of wage decisions in a democraticplanned economy can guarantee a unique political-economic equilibrium anda growth path that is middle-class-oriented. Third, when utility satisfiescertain conditions, a democratic planned economy can experience the samegrowth path and income-distributional neutrality on growth as that of a freeeconomy.
Cross-country and cross-time empirical evidence (Chapter 4) are providedto test theoretical predictions and raise questions for future theoretical explanation.In particular, I find that the growth rate of the population andthe ratio of gross private investment to GDP have significantly negative andpositive effects on economic growth, respectively.
