The Public Provision of Goods in Democracies: Do Age and Inequality matter?

We build a multi-dimensional model of political decision-making with endogenous political parties to analyse the effect of inequality and demography on public spending. Voters differ in terms of income and age. Political competition determines in equilibrium the tax rate and the allocation of revenue between income redistribution and two forms of public spending — a capital good and a neutral good. All agents value the neutral good equally but the young like capital spending more than the old do. We show that the effect of age (resp., inequality) on equilibrium public spending can go in any direction based on the underlying level of inequality (resp., age). Our findings reconcile a large body of seemingly contradictory stylised empirical findings in public economics.