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Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies

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  • Drazen, Allan
  • Limão, Nuno

Abstract

We consider a bargaining model of the interaction between a government and interest groups in which, unlike existing models, neither side is assumed to have all the bargaining power. The government will then find it optimal to constrain itself in the use of transfer policies to improve its bargaining position. In a model of redistribution to lobbies, the government will find it optimal to cap the size of lump-sum transfers it makes below the unconstrained equilibrium level. One implication is that with the optimal cap on efficient subsidies in place, less efficient subsidies will be used for redistribution even when they serve no economic function. We thus offer an alternative theory that explains why governments may optimally choose to restrict efficient lump-sum transfers to interest groups and partially replace them with relatively less efficient transfers.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4007.

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Date of creation: Aug 2003
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Handle: RePEc:cpr:ceprdp:4007

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Keywords: bargaining; caps; inefficient transfers; lobbies; special interests;

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References

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  1. Drazen, Allan, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," CEPR Discussion Papers 3562, C.E.P.R. Discussion Papers.
  2. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
  3. Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, vol. 43(3), pages 513-18, May.
  4. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  5. Neil Bruce & Michael Waldman, 1988. "Transfers in Kind: Why They Can Be Efficient and Non-Paternalistic," UCLA Economics Working Papers 532, UCLA Department of Economics.
  6. Westcott, Paul C. & Young, C. Edwin & Price, J. Michael, 2002. "The 2002 Farm Act: Provisions And Implications For Commodity Markets," Agricultural Information Bulletins 33745, United States Department of Agriculture, Economic Research Service.
  7. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-35, December.
  8. Dixit, Avinash K & Londregan, John, 1994. "Redistributive Politics and Economic Efficiency," CEPR Discussion Papers 1056, C.E.P.R. Discussion Papers.
  9. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  10. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 752-69, August.
  11. Allan Drazen, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 36-67.
  12. Rodrik, Dani, 1986. "Tariffs, subsidies, and welfare with endogenous policy," Journal of International Economics, Elsevier, vol. 21(3-4), pages 285-299, November.
  13. John Douglas Wilson, 1990. "Are Efficiency Improvements In Government Transfer Policies Self-Defeating In Political Equilibrium?," Economics and Politics, Wiley Blackwell, vol. 2(3), pages 241-258, November.
  14. Acemoglu, Daron & Robinson, James A, 1999. "Inefficient Redistribution," CEPR Discussion Papers 2122, C.E.P.R. Discussion Papers.
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Cited by:
  1. Amin, Mohammad & Mattoo, Aaditya, 2006. "Can guest worker schemes reduce illegal migration ?," Policy Research Working Paper Series 3828, The World Bank.
  2. Börner, Kira, 2004. "Political Economy Reasons for Government Inertia: The Role of Interest Groups in the Case of Access to Medicines," Discussion Papers in Economics 313, University of Munich, Department of Economics.
  3. Boerner, Kira, 2005. "Having Everyone in the Boat May Sink it - Interest Group Involvement and Policy Reforms," Discussion Papers in Economics 730, University of Munich, Department of Economics.

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