Three Essays on Inequality and Political Economy

This thesis consists of three essays in the areas of political economy and applied microeconomics, covering housing, inequality, and public sector pensions. Once economies of scale are allowed into the production function, income distribution is no longer necessarily independent of efficiency in a general equilibrium framework. Chapter 2 analyzes a three-good, three-class general equilibrium model where external economies of scale exist on goods consumed primarily by the middleclass, and households have a preference for variety. In the case where the capital-labor ratio is the same across all goods, a transfer from a wealthy home to several poor homes increases consumption by the remaining citizens. Furthermore, if economies of scale are not too small, there exists a transfer from rich to middle-class households that is Pareto-optimal. Finally, the chapter demonstrates that a proportional increase in the size of the economy can offer the same benefits as redistribution. Cities around the world are experiencing a period of rising house prices and slow development, which is often attributed to increased development regulation. In Chapter 3 I develop a model of the housing market that incorporates congestion, and show that homeowners prefer to restrict housing supply more than renters. I test this model using 40 years of census data from two Australian cities. I demonstrate that public support for regulation can be traced back to homeowners, who seek to restrict supply below market levels in order to elevate the price of their assets and reduce local crowding externalities. I find that a 10 percentage-point decrease in home ownership rates over our period would result in an increase of around 1.6 million dwellings in Sydney, enough to house 14% of the 2011 population on a two-person-per-dwelling basis. A move to a centralized governance structure for the whole city would eliminate this relationship. In addition, I find that regardless of governance structure the proportion of elderly residents is negatively correlated with growth while income is, if anything, positively correlated with growth. The present value of unfunded local government defined benefit pension liabilities has escalated since the 2008 financial crisis. Chapter 4 considers the arguments for and against switching local government pensions from defined benefit schemes to defined contribution schemes. I note that the relative generosity of government pension schemes compared with the private sector is not necessarily tied to the pension structure. Also, defined benefit pensions may sometimes be cheaper for employers than defined contribution plans, as they allow employers to pool risks that they must otherwise compensate their employees for bearing. I use propensity score matching to test the difference between total remuneration of county employees in Nebraska (def ined contribution) and Kansas (defined benefit). I find that there is little difference between the cost of the total package under either plan. Furthermore, any differences are not consistent in either magnitude or sign between different sub categories of employees, or over time. I therefore conclude that there is no strong financial reason to recommend either plan structure over the other