Population Aging, the Composition of Government Spending, and Endogenous Economic Growth in Politico-Economic Equilibrium

This paper introduces a democratic voting process into an OLG economyin order to analyze the effects of a rising old-age dependency ratio on the composition ofgovernment spending and endogenous economic growth. Forward-looking agents vote eachperiod on the public policy mix between productive government expenditure and publicconsumption spending that benefits the elderly. Population aging shifts political powerfrom the young to the old. While this does not affect public productive expenditure,it leads to an increase in public spending on the elderly and a slowdown in economicgrowth. However, the overall effect on long-term economic growth is positive. This is dueto reduced capital dilution or increased saving.[...]