Economic Growth and Income Redistribution: A Differential Game Approach

Abstract

This paper presents redistributive taxation and economic growth as a differential game in which the politically powerful poor (workers) control redistribution whereas the economically powerful rich (capitalists) control accumulation. Both groups are assumed to be interested in maximizing the sum of their own discounted consumption over an infinite horizon. The players use memory strategies which permit the construction of threats designed to sustain cooperation. Efficient equilibria imply income transfer from the rich to the poor in the long run. If the workers can act as leaders in the game, almost all profits, net of the amount required to sustain growth, can be transfered for their consumption. The result is contrasted with some recent views on capital income taxation.

• ISSN: 0357-9603
• ISBN: 951-9281-64-9