A Dynamic Politico-Economic Model of Intergenerational Contracts

This paper investigates the conditions for the emergence of implicit intergenerational contracts without assuming reputation mechanisms, commitment technology and altruism. We
present a tractable dynamic politico-economic model in OLG environment where politicians
play Markovian strategies in a probabilistic voting environment, setting multidimensional
political agenda. Both backward and forward intergenerational transfers, respectively in the
form of pension benefits and higher education investments, are simultaneously considered
in an endogenous human capital setting with labor income taxation. On one hand, social
security sustains investment in public education; on the other hand investment in education creates a dynamic linkage across periods through both human and physical capital
driving the economy toward dierent Welfare State Regimes. Embedding a repeated-voting
setup of electoral competition, we find that in a dynamic ecient economy both forward
and backward intergenerational transfers simultaneously arise. The equilibrium allocation
is education ecient, but, due to political overrepresentation of elderly agents, the electoral
competition process induces overtaxation compared with a Benevolent Government solution
with balanced welfare weights.