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Tax contracts and elections

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  • Gersbach, Hans
  • Schneider, Maik T.

Abstract

In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambiguously improve the welfare of the median voter.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 7 ()
Pages: 1461-1479

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:7:p:1461-1479

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Political contracts; Elections; Government formation; Tax promise;

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References

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  1. Hans Gersbach & Maik T. Schneider, 2009. "Tax Contracts and Elections," CER-ETH Economics working paper series 09/123, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  2. Levy, Gilat, 2004. "A model of political parties," Journal of Economic Theory, Elsevier, vol. 115(2), pages 250-277, April.
  3. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
  4. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  5. Schaltegger, Christoph A. & Feld, Lars P., 2009. "Do large cabinets favor large governments? Evidence on the fiscal commons problem for Swiss Cantons," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 35-47, February.
  6. Myerson Roger B., 1993. "Effectiveness of Electoral Systems for Reducing Government Corruption: A Game-Theoretic Analysis," Games and Economic Behavior, Elsevier, vol. 5(1), pages 118-132, January.
  7. Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753, October.
  8. Christian Schultz & Ignacio Ortuño Ortín, 2000. "Public Funding Of Political Parties," Working Papers. Serie AD 2000-27, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  9. Roland Bénabou, 2008. "Joseph Schumpeter Lecture Ideology," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 321-352, 04-05.
  10. Feld, Lars P. & Matsusaka, John G., 2003. "Budget referendums and government spending: evidence from Swiss cantons," Journal of Public Economics, Elsevier, vol. 87(12), pages 2703-2724, December.
  11. McKelvey, Richard D. & Ordeshook, Peter C., 1987. "Elections with limited information: A multidimensional model," Mathematical Social Sciences, Elsevier, vol. 14(1), pages 77-99, August.
  12. Enriqueta Aragonès & Thomas Palfrey & Andrew Postlewaite, 2007. "Political Reputations and Campaign Promises," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 846-884, 06.
  13. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
  14. Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
  15. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  16. Michele Polo, . "Electoral competition and political rents," Working Papers 144, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  17. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
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Citations

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Cited by:
  1. Hans Gersbach, 2001. "Competition of Politicians for Incentive Contracts and Elections," CESifo Working Paper Series 406, CESifo Group Munich.
  2. Gersbach, Hans & Liessem, Verena, 2005. "Re-election Threshold Contracts in Politics," CEPR Discussion Papers 5175, C.E.P.R. Discussion Papers.
  3. Markus Müller, 2007. "Motivation of politicians and long-term policies," Public Choice, Springer, vol. 132(3), pages 273-289, September.
  4. Gersbach, Hans & Schneider, Maik, 2012. "Tax Contracts and Elections," CEPR Discussion Papers 9054, C.E.P.R. Discussion Papers.
  5. Gersbach Hans, 2012. "Contractual Democracy," Review of Law & Economics, De Gruyter, vol. 8(3), pages 823-851, December.
  6. Verena Liessem, 2008. "Electoral competition, incentive contracts for politicians and unknown preferences," Social Choice and Welfare, Springer, vol. 30(1), pages 13-41, January.
  7. Hans Gersbach & Markus Müller, 2011. "Information Markets, Elections and Contracts," CESifo Working Paper Series 3327, CESifo Group Munich.
  8. Gersbach, Hans & Muller, Markus, 2006. "Elections, Contracts and Markets," CEPR Discussion Papers 5717, C.E.P.R. Discussion Papers.
  9. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts, party bargaining, and government formation," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 173-192.

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