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Dynamic Bargaining over Redistribution in Legislatures

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  • Facundo Piguillem

    (EIEF)

  • Alessandro Riboni

    (Ecole Polytechnique (Paris) and Université de Montréal)

Abstract

In modern democracies, public policies are negotiated among elected policymakers. Yet, most macroeconomic models abstract from post-election negotiation. In order to understand the determinants of redistribution, this paper studies legislative bargaining in a growth model where individuals are heterogeneous in their initial capital. Legislators with time-inconsistent preferences negotiate over a linear capital tax. As often the case in actual budget negotiations, we assume that the default option in every legislative session coincides with the previous period's tax. The endogeneity of the status quo forces policymakers to internalize how current decisions affect their bargaining power in future sessions. This channel has far-reaching implications on equilibrium tax levels and on how taxes vary with the institutional environment. On average we obtain capital taxes between 8% and 50%, depending on the distribution of legislators' wealth and on the specifics of the institutions. Finally, we show that political growth cycles arise: decades with low taxes and growing capital are followed by decades with high taxes and decreasing capital (and vice versa).

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1206.

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Length: 42 pages
Date of creation: 2012
Date of revision: Dec 2012
Handle: RePEc:eie:wpaper:1206

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  1. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
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  8. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  9. Anderson L. Schneider & Facundo Piguillem, 2008. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," 2008 Meeting Papers 835, Society for Economic Dynamics.
  10. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
  11. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  12. Marco Bassetto, 2008. "Political Economy of Taxation in an Overlapping-Generations Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 18-43, January.
  13. Thomas Piketty & Emmanuel Saez, 2012. "A Theory of Optimal Capital Taxation," NBER Working Papers 17989, National Bureau of Economic Research, Inc.
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  15. Barseghyan, Levon & Battaglini, Marco & Coate, Stephen, 2013. "Fiscal policy over the real business cycle: A positive theory," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2223-2265.
  16. Alessandro Riboni, 2010. "Committees As Substitutes For Commitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 213-236, 02.
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Cited by:
  1. Facundo Piguillem & Alessandro Riboni, 2013. "Spending Biased Legislators - Discipline Through Disagreement," EIEF Working Papers Series 1317, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2013.
  2. Baron, David P. & Bowen, T. Renee, 2013. "Dynamic Coalitions," Research Papers 2128, Stanford University, Graduate School of Business.
  3. T. Renee Bowen & Ying Chen & Hülya Eraslan, 2012. "Mandatory Versus Discretionary Spending: the Status Quo Effect," Economics Working Paper Archive 603, The Johns Hopkins University,Department of Economics.

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