The political economy of public investment when population is aging: A panel cointegration analysis

- We study the relationship between population aging and public investment using panel cointegration techniques.
- Senior citizens might oppose public investment because they expect little individual returns.
- In fact, a higher share of elderly people is associated with less public investment.
- Long-run Granger causality runs exclusively from population aging to public investment.

Time preferences vary by age. Notably, according to experimental studies, senior citizens tend to discount future payoffs more heavily than working-age individuals. Based on these findings, we hypothesize that demographic change has contributed to the cut-back in government-financed investment that many advanced economies experienced over the last four decades. We demonstrate for a panel of 19 OECD countries between 1971 and 2007 that the share of elderly people and public investment rates are cointegrated, indicating a long-run relationship between them. Estimating this cointegration relationship via dynamic OLS (DOLS) we find a negative and significant effect of population aging on public investment. Moreover, the estimation of an error correction model reveals long-run Granger causality running exclusively from aging to investment. Our results are robust to the inclusion of additional control variables typically considered in the literature on the determinants of public investment.