Age bias in fiscal policy: Why does the political process favor the elderly

Across countries, public policy tends to favor the elderly. This dissertation explores the existence and consequences of "age bias" using a new solution concept for dynamic political economy problems. The second chapter is a paper co-authored with B. Douglas Bernheim, and it introduces the notion of a Dynamic Condorcet Winner (DCW). This new solution concept extends the notion of a Condorcet winner to dynamic settings in which collective choices may be history dependent. We examine existence, characterize sustainable and unsustainable outcomes, study the effects of changes in the discount factor, investigate efficiency properties, and explore the potential for achieving renegotiation-proof outcomes. We also explore the relation between DCWs and game-theoretic solution concepts. In the third chapter, I extend this solution concept to an overlapping generations (OLG) setting and use it to study the problem of dividing a fixed surplus among individuals of different ages. I show that the set of DCWs exhibits bias towards the elderly in the sense that there are DCWs in which the elderly receive a large share of the payoff, but no symmetric DCWs in which the young receive a similar share. In the fourth chapter, I present a method of finding DCWs computationally and use it to provide a systematic comparison of the public and private provision of public goods. I model private provision as a voluntary contributions game; the public provision outcome is represented by the set of DCWs. In a static setting with homogeneous preferences, public provision generally exceeds private provision as it does not require any individual to pay the entire cost of increasing the public good at the margin. If agents are infinite lived, however, this result no longer holds: high levels of private provision are sustainable using appropriate punishments. In contrast, in an OLG setting, public provision once again tends to exceed private provision. Here, however, the result stems from age bias: the elderly cannot be induced to contribute to the public good under private provision, as they cannot be punished for free riding. However, they can be compelled to contribute under public provision, thereby making universal contributions possible.