The Political Economy of Investment in Human Capital

Abstract

Investments in human capital accumulation, government consumption and total government expenditures present a striking negative correlation with capital shares. This correlation is robust to alternative specifications, lists of controls, and exclusion of outliers. Causality tests strongly support the hypothesis that the direction of causation runs from capital shares to the government spending variables. We present a political economy model of interest groups that can account for these correlations.In contrast, a median voter model predicts positive correlations between capital shares and the government spending variables.

Inequality, Redistribution, and Rent‐seeking

“…Rodrı´guez (1999a) finds no evidence of a link between inequality and redistribution in cross-state regressions using higher quality US data. In fact, Pineda and Rodrı´guez (1999) have found a strong negative association between redistribution and capital's share of GDP. 2 Despite this preponderance of evidence to the contrary, existing theories of the political economy of redistribution point in the direction of a positive association between inequality and redistribution.…”

Inequality, Technology and the Social Contract

“…23 It is now well-recognized that the standard median-voter model's prediction of a positive effect of inequality on redistribution fails to explain the empirical patterns actually observed, both across countries (see, e.g., Perotti (1996), Bénabou (1996aBénabou ( , 2000, Alesina et al (2002)) and within them (see Rodriguez (1999) for panel-data tests on US states). Among developed countries, in particular, the relationship is in fact negative (Pineda and Rodriguez (2000). The present framework explains how and when greater inequality will indeed reduce redistribution, or even result in regressive policies -both in the short run (Proposition 3) and in the long-run, when both are endogenous (Proposition 4 below).…”

“…Third, while in the short-run the relationship is non-monotonic, there emerges in the long-run a negative correlation between inequality and redistribution, as indeed one observes between the United States and Europe, or among advanced countries in general (Pineda and Rodriguez (2000)).…”

“…Recent papers that aim to endogenously explain the allocation of political power in a country (corresponding here to the parameter λ) includeBourguignon and Verdier (2000),Pineda and Rodriguez (2000),Acemoglu and Robinson (2000), andBaland and Robinson (2003).23 A similar form of non-monotonicity (U-shape, or even declining throughout for λ high enough) is obtained with a Pareto distribution byLee and Romer (1998).…”

Inequality, Technology, and the Social Contract

“…It is now well-recognized that the standard median-voter model's prediction of a positive effect of inequality on redistribution fails to explain the empirical patterns actually observed, both across countries (see, e.g., Perotti (1996), Bénabou (1996aBénabou ( , 2000, Alesina et al (2002)) and within them (see Rodriguez in fact negative (Pineda and Rodriguez (2000). The present framework explains how and when greater inequality will indeed reduce redistribution, or even result in regressive policies -both in the short run (Proposition 3) and in the long-run, when both are endogenous (Proposition 4 below).…”