Demographics and competition for capital in political economy

We examine the possible impacts of demographics on outcomes of competition for capital in political economy. For this, we develop a multi-region overlapping generations model, wherein public good provision financed by capital taxation is determined by majority vote. When population is growing, younger people represent the majority, whereas when it is decreasing, older people are in majority. We uncover the possible externalities arising from political processes as well as capital mobility and show that an inefficiently high capital tax rate is more likely to emerge in an economy with decreasing population than in one with growing population.