A second chance at success A political economy perspective

• Published in: Journal of economic theory Vol. 144; no. 3; pp. 1249 - 1277
• Main Authors: Arawatari, Ryo, Ono, Tetsuo
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.05.2009; Elsevier; Elsevier Science Publishing Company, Inc
• Series: Journal of Economic Theory
• Subjects: Agency theory; Bildungschance; Bildungsinvestition; Cost analysis; Demokratie; Economic theory; Education; Einkommensteuer; Equilibrium; Income tax; Inequality; Intragenerational mobility; Investition; Investment; Kosten; Markovian processes; Political economy; Redistribution; Second chance; Second chance Political economy Stationary Markov-perfect equilibrium Redistribution Inequality Upward mobility Intragenerational mobility; Stationary Markov-perfect equilibrium; Studies; Theorie; Upward mobility; Welfare; Wirtschaftstheorie; D30; D63; H20; H55; Political economy; Upward mobility; Intragenerational mobility; I38; Redistribution; Second chance; Stationary Markov-perfect equilibrium; D72; Inequality
• ISSN: 0022-0531; 1095-7235
• DOI: 10.1016/j.jet.2008.11.002

This paper characterizes a stationary Markov-perfect political equilibrium where agents vote over income taxation that distorts educational investment. Agents become rich or poor through educational investment, and the poor have a second chance at success. The results show the following concerning the cost of a second chance. First, when the cost is low, the economy is characterized by high levels of upward mobility and inequality, and a low tax burden supported by the poor with prospects for upward mobility. Second, when the cost is high, there are multiple equilibria with various patterns of upward mobility, inequality and redistribution. Numerical examples show that the shift from a high-cost economy to a low-cost economy may reduce social welfare.