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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 Economic 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. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  2. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, Taxes and the Median Voter," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 211-223, April.
  3. Mark Aguiar & Manuel Amador, 2010. "Growth in the Shadow of Expropriation," 2010 Meeting Papers 1194, Society for Economic Dynamics.
  4. RIBONI, Alessandro & RUGE-MURCIA, Francisco J., 2008. "Monetary Policy by Committee: Consensus, Chairman Dominance or Simple Majority?," Cahiers de recherche 02-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Facundo Piguillem & Anderson Schneider, 2013. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 332-349, April.
  6. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
  7. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
  8. Ruediger Bachmann & Jinhui Bai, . "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  9. Kalandrakis, Anastassios, 2004. "A three-player dynamic majoritarian bargaining game," Journal of Economic Theory, Elsevier, vol. 116(2), pages 294-322, June.
  10. Corbae, Dean & D'Erasmo, Pablo & Kuruscu, Burhanettin, 2009. "Politico-economic consequences of rising wage inequality," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 43-61, January.
  11. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  12. Marco Bassetto, 1999. "Political economy of taxation in an overlapping-generations economy," Discussion Paper / Institute for Empirical Macroeconomics 133, Federal Reserve Bank of Minneapolis.
  13. John Duggan & Tasos Kalandrakis, 2011. "A Newton collocation method for solving dynamic bargaining games," Social Choice and Welfare, Springer, vol. 36(3), pages 611-650, April.
  14. 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. 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.
  2. Baron, David P. & Bowen, T. Renee, 2013. "Dynamic Coalitions," Research Papers 2128, Stanford University, Graduate School of Business.

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