The Fiscal Politics of Big Governments: Do Coalitions Matter?

This paper uses a closed voting rule to explain how gradual changes in the socio-economic structure of developed societies shift political coalitions and lead to rapid expansions of transfer programs. Equilibria in a lifecycle economy with three homogeneous groups of voters (retirees, skilled young workers, unskilled young workers) have three properties. One, if income inequality is sufficiently high, unskilled workers and retirees will form a dominant coalition which raises both intragenerational and intergenerational transfers. Two, when capital is abundant relative to labor, government transfers will be strictly intergenerational. Three, all transfers increase when the voting franchise is extended to less affluent individuals.