This paper studies the political-economic equilibrium of a two period model with overlapping generations. In each period the policy is chosen under majority rule by the generations currently alive. The paper identifies a "politically viable" set of values for public debt. Any amount of debt within this set is fully repaid in equilibrium, even without commitments. By issuing debt within this set, the first generation redistributes revenue in its favor and away from the second generation. The paper characterizes the determinants of the equilibrium intergenerational redistribution and identifies a difference between debt and social security as instruments of redistribution.

We offer a theory of changing dimensions of political polarization based on endogenous social identity. We formalize voter identity as in Bonomi, Gennaioli, and Tabellini (2021), but add parties that compete on policy and spread stereotypes to persuade voters. Parties are historically connected to different social groups, whose members are more receptive to the party messages. An endogenous switch from class to cultural identity accounts for three major changes: (i) growing cultural conflict between voters and parties; (ii) dampening of redistributive conflict, despite rising inequality; (iii) a realignment of lower class voters from the left to the right. The incentive of parties to spread stereotypes is a key driver of identity‐based polarization. Using survey data and congressional speeches, we show that—consistent with our model—there is evidence of (i) and (ii) in the voting realignment induced by the “China Shock” (Autor, Dorn, Hanson, and Majlesi (2020)).

Is inequality harmful for growth? We suggest that it is. In a society where distributional conflict is important, political decisions produce economic policies that tax investment and growth-promoting activities in order to redistribute income. The paper formulates a theoretical model that captures this idea. The model's implications are supported by the evidence. Both historical panel data and postwar cross sections indicate a significant and large negative relation between inequality and growth. This relation is only present in democracies.

This paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending. All voters agree that a balanced budget is ex ante optimal. However, if there is disagreement between current and future majorities, a balanced budget is not a political equilibrium under majority rule. Under certain conditions a majority of the voters favors a budget deficit, and the equilibrium deficit is larger the greater is the polarization among voters.

This paper proposes a positive theory of tariff formation, based on the idea that the optimal trade policy may be time inconsistent. A benevolent government with redistributive goals may have an incentive to provide protection, since the redistributive effects of trade policy are larger if the policy is unanticipated. The suboptimal but time-consistent policy involves an excessive amount of protection. Furthermore, in a time- consistent equilibrium tariffs may dominate production subsidies. Thus, the requirement of time consistency can lead to a reversal of traditional normative ordering of tariffs and subsidies as instruments of trade policy.

What explains the range of situations in which individuals cooperate? This paper studies a model where individuals respond to incentives but are also influenced by norms of good conduct inherited from earlier generations. Parents rationally choose what values to transmit to their offspring, and this choice is influenced by the spatial patterns of external enforcement and of likely future transactions. The equilibrium displays strategic complementarities between values and current behavior, which reinforce the effects of changes in the external environment. Values evolve gradually over time, and if the quality of legal enforcement is chosen under majority rule, there is path dependence: adverse initial conditions may lead to a unique equilibrium where legal enforcement remains weak and individual values discourage cooperation.

The importance of seigniorage relative to other sources of government revenue differs markedly across countries. This paper tries to explain this regularity by studying a political model of tax reform. The model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and, thus, will rely more heavily on seigniorage. This prediction of the model is tested on cross-sectional data for 79 countries. We find that, after controlling for other variables, political instability is positively associated with seigniorage.

This paper studies the political-economic equilibrium of a two period model with overlapping generations. In each period the policy is chosen under majority rule by the generations currently alive. The paper identifies a "politically viable" set of values for public debt. Any amount of debt within this set is fully repaid in equilibrium, even without commitments. By issuing debt within this set, the first generation redistributes revenue in its favor and away from the second generation. The paper characterizes the determinants of the equilibrium intergenerational redistribution and identifies a difference between debt and social security as instruments of redistribution.

The internal market in Europe will greatly increase the international mobility of resources. How will this affect fiscal policy in different countries? We consider taxation of capital in a two-country model, where a democratically-chosen government in each country chooses tax policy. Higher capital mobility changes the politico-economic equilibrium in two ways. On the one hand, it leads to more tax competition between the countries: this “economic effect” tends to lower tax rates in both countries. On the other hand, it alters voters' preferences and makes them elect a different government: this “political effect” offsets the increased tax competition, although not completely.