Do Welfare‐Maximizing Governments Cause Political Business Cycles in Growth and Inequality?

In this paper we study how an elected government maximizes social welfare over its period in office, subject to a growth–equality trade‐off. Optimal output and equality paths are derived and their implications are discussed. A central finding is the prediction of political business cycles in both growth and equality. It is also demonstrated that any tightening of the growth–equality trade‐off should encourage government to favour growth relative to equality.