Evangelos V. Dioikitopoulos

ENDOGENOUS TIME PREFERENCE AND PUBLIC POLICY: GROWTH AND FISCAL IMPLICATIONS

This paper studies the growth and fiscal policy implications of the assumption that public policy generates an externality in the individual rate of time preference through the aggregate public capital stock. We examine the competitive equilibrium properties and we solve for endogenous growth–maximizing fiscal policy. We investigate the behavior of the government size and the growth rate to the sensitivity of time preference to public capital and the magnitude of public capital externality on production. We find that the Barro taxation rule [Barro, Robert J., Journal of Political Economy 98 (1990), 103–125], which states that the elasticity of public capital in the production function should equal the government size, is suboptimal. We show that the government does not necessarily have to increase income taxation following a rise in public capital intensity because of the externality of public capital on time preference and, in turn, on growth and the tax base of the economy.

Aging, growth and the allocation of public expenditures on health and education

In this paper, I develop an overlapping generations endogenous growth model in which both public education and health are sources of growth by affecting the accumulation rate of the human capital stock and the savings rate over life expectancy. I first find that dynamic complementarities of public expenditures lead to minimum threshold levels of public education and health expenditures that ensure sustainable growth. I then show how governments can use the allocation of public expenditures as an alternative policy instrument to maximize growth without increasing the tax rate or the retirement age, as usually happens in aging economies.

Dynamic Status Effects, Savings, and Income Inequality

This paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society (endogenous dynamic status effect), in accordance with empirical evidence. Our behavioral driven theory is able to replicate the contradictory historical facts of an increasing saving rate along with declining returns on capital over time. As an implication of our hypothesis, we are able to provide a theoretical foundation for the observed dynamics on comparative development of income inequality across different countries. In particular, our theory implies that, as an economy develops, the saving rate increases during transition altering the speed of convergence relative to the standard neoclassical growth model. The initially lower and then increasing saving rate during the process of development benefits the wealthy households relative to poor ones, as the rate of interest on capital declines at a lower rate. Therefore, the endogenous dynamic status effect contributes to a rise in wealth inequality. Along the same lines, we analyze the behavior of inequality in response to changes in wealth (income) induced by productivity shocks. Under a positive productivity shock, in economies with a strong enough endogenous dynamic status effect, inequality increases - a fact that we experience in many countries around the globe.