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Political intervention in economic activity

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  • Enrique Gilles

Abstract

This paper proposes a political economy explanation of bailouts to declining industries. A model of probabilistic voting is developed, in which two candidates compete for the vote of two groups of the society through tactical redistribution. We allow politicians to have core support groups they understand better, this implies politicians are more or less effective to deliver favors to some groups. This setting is suited to reproduce pork barrels or machine politics and patronage. We use this model to illustrate the case of an economy with both an efficient industryand a declining one, in which workers elect their government. We present the conditions under which the political process ends up with the lagged-behind industry being allowed to survive.

Suggested Citation

  • Enrique Gilles, 2010. "Political intervention in economic activity," Documentos de Trabajo 7180, Universidad del Rosario.
    • Handle: RePEc:col:000092:007180
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    File URL: http://repository.urosario.edu.co/bitstream/handle/10336/10810/7180.pdf
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    References listed on IDEAS

    as
    1. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    2. Robinson, James A. & Torvik, Ragnar, 2009. "A political economy theory of the soft budget constraint," European Economic Review, Elsevier, vol. 53(7), pages 786-798, October.
    3. Dixit, Avinash & Londregan, John, 1995. "Redistributive Politics and Economic Efficiency," American Political Science Review, Cambridge University Press, vol. 89(4), pages 856-866, December.
    4. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    probabilistic voting; redistribution; survival of inefficient firms; porkbarrels;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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