Aggregation and Aggregation

We discuss economic aggregation and political aggregation in the context of a simple dynamic version of the canonical political-economy model--the Meltzer-Richard model. Consumers differ both in labor productivity and initial asset wealth and there is no physical capital. Under commitment over future tax policy, and for economic preferences that imply aggregation in assets and productivity, the induced policy preferences for individuals do not depend on any distributional characteristics other than means. They imply time inconsistency, with taxes changing between the first and the second periods and staying constant thereafter. Political aggregation in the form of a median-voter theorem applies only in special cases. (JEL: D72, D78, E61, H23) (c) 2008 by the European Economic Association.