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Working paper

Redistrubution and the political support of free-entry policy in the Schumpeterian model with heterogenous agents

We consider the problem of finding sufficient conditions for political support of liberal, growth-enhancing policy in a quality-ladders model with heterogeneous agents differing in their endowment of wealth and skills. The policy set is two-dimensional: Agents vote for the level of redistribution as well as for the level of entry barriers preventing the creation of more efficient firms. We show that under the majority voting rule there are three possible stable political outcomes: full redistribution, low redistribution and low barriers for entry (“liberal” order), high redistribution and high barriers for entry (“corporatism”). We show that key variables determining the political outcome are the expected gain from technological adoption, the ratio of total profits to total wages, and the skewness of human capital distribution.