Efficient Game-Equilibrium Growth and Redistribution in a Capitalist Economy

Working Papers 74 Pohjola Matti and Kaitala Veijo

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 th 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 that consumption is suppressed at an early stage of development to attain the most rapid growth and ultimate redistribution of income from the rich to the poor. If the workers can act as leaders in the game, almost all profits, net of the amount required to sustain growth, can transferred for their consumption in the steady state. The properties of the memory strategies and the dependence of sustainable cooperative policies on the technology, preferences and history of the economy are discussed.