This PDF provides the politico-economic microfoundations of the model. Section B2 provides the derivation of equation (9). Section B3 provides the proof of Proposition 2. Section B4 extends the analysis under CRRA utility. Section B5 shows the result of numerical analysis using the alternative method of Krusell et al. (2002). Finally, Section B6 shows the details of the numerical analysis of a demographic transition such as the one discussed in the text.