Public Investment, Political Institution, and Economic Growth under Two-Sided Altruism

Abstract

Abstract This paper examines how intergenerational conflicts between young and senior people affect fiscal policies and macroeconomic performance in the democratic economy. A two-sided overlapping generations model of endogenous growth with private and public capital is developed to analyze the public investment financed by a distortionary tax under parliament decision-making. Two-sided altruism generates future bias for young people rather than for senior people. The parliament in society is future-biased through the political power of the young relative to the old. Stronger young’s political power leads to higher tax rates for larger public investment because the future-biased young people are willing to receive the benefits from public investment in the future rather than decreased tax in the present. Increased public investment boosts private investment, leading to high economic growth, by the complementarity between two capitals in production. Therefore, it implies that the weaker young’s political power impedes economic growth through smaller public investment as population aging proceeds.