Macroeconomic Consequences of Distributional Conflicts

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Macroeconomic Consequences of Distributional Conflicts

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Andreas Schäfer ()
Thomas Steger ()

Additional information is available for the following registered author(s):

Thomas Michael 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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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 2007.

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

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Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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