Published online by Cambridge University Press: 27 March 2018
This study presents an overlapping-generations model featuring capital accumulation, collective wage-bargaining, and probabilistic voting over fiscal policy. The study characterizes a Markov-perfect political equilibrium of the voting game within and across generations, and it derives the following results. First, the greater bargaining power of unions lowers the capital growth rate and creates a positive correlation between unemployment and public debt. Second, an increase in the political power of elderly persons lowers the growth rate and shifts government expenditure from unemployed persons to elderly ones. Third, prohibiting debt finance increases the growth rate and benefits future generations; however, it worsens the state of present-day employed and unemployed persons.
I would like to thank the Associate Editor and two anonymous referees for their comments and suggestions. I also thank Yuki Uchida for his research assistance. This work was supported in part by a Grant-in-Aid for Scientific Research (C) from the Ministry of Education, Culture, Sports, Science and Technology of Japan (No. 15K03509).