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Macroeconomic Consequences of Distributional Conflicts

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  • Andreas Schäfer
  • Thomas Steger

Abstract

This paper aims at better understanding the inefficiency due to distributional conflicts, which are inherent in every market economy. To this end, we set up a simple general equilibrium model with the following characteristics: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The political mechanism employed in this paper accounts for the evidence showing that the degree of organization of major interest groups has an impact on political outcomes and, in addition, allows for strategic interaction among major interest groups. We decompose the overall inefficiency into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) shows that the distributional-conflict inefficiency may cause a substantial output loss of about 7%.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2007.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2007

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Keywords: distributional conflict; time inconsistency; strategic interaction; heterogeneity;

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  1. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 93-107, May.
  2. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 329-340, December.
  3. Caselli, Francesco, 2004. "Accounting for Cross-Country Income Differences," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4703, C.E.P.R. Discussion Papers.
  4. Jean-Robert Tyran & Rupert Sausgruber, 2002. "A Little Fairness may Induce a Lot of Redistribution in Democracy," University of St. Gallen Department of Economics working paper series 2002, Department of Economics, University of St. Gallen 2002-30, Department of Economics, University of St. Gallen.
  5. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 183-204, January.
  6. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(3), pages 371-400, August.
  7. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 130, University of Rochester - Center for Economic Research (RCER).
  8. Hassler, John & Mora, Jose & Storesletten, Kjetil & Zilibotti, Fabrizio, 2002. "The Survival of the Welfare State," Seminar Papers, Stockholm University, Institute for International Economic Studies 704, Stockholm University, Institute for International Economic Studies.
  9. Benhabib, Jess & Rustichini, Aldo, 1996. " Social Conflict and Growth," Journal of Economic Growth, Springer, Springer, vol. 1(1), pages 125-42, March.
  10. Bertola, Giuseppe, 1991. "Factor Shares and Savings In Endogenous Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 576, C.E.P.R. Discussion Papers.
  11. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
  12. Arjan Lejour & Harrie Verbon, 1997. "Tax Competition and Redistribution in a Two-Country Endogenous-Growth Model," International Tax and Public Finance, Springer, Springer, vol. 4(4), pages 485-497, November.
  13. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 817-868, August.
  14. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 914-27, October.
  15. Francesco Caselli, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3567, London School of Economics and Political Science, LSE Library.
  16. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda, Federal Reserve Bank of Chicago 88-7, Federal Reserve Bank of Chicago.
  17. Lancaster, Kelvin, 1973. "The Dynamic Inefficiency of Capitalism," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(5), pages 1092-1109, Sept.-Oct.
  18. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, Elsevier, vol. 4(2), pages 163-185, February.
  19. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  20. Daron Acemoglu & Georgy Egorov & Konstantin Sonin, 2006. "Coalition Formation in Political Games," NBER Working Papers 12749, National Bureau of Economic Research, Inc.
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