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Tax Contracts and Elections

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Abstract

In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambigously improve the welfare of the median voter.

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Bibliographic Info

Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/123.

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Length: 50 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:eth:wpswif:09-123

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Keywords: political contracts; elections; government formation; tax promise;

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References

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  13. McKelvey, Richard D. & Ordeshook, Peter C., 1987. "Elections with limited information: A multidimensional model," Mathematical Social Sciences, Elsevier, vol. 14(1), pages 77-99, August.
  14. Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
  15. Michele Polo, . "Electoral competition and political rents," Working Papers 144, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
  17. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
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Cited by:
  1. Hans Gersbach & Markus Müller, 2011. "Information Markets, Elections and Contracts," CESifo Working Paper Series 3327, CESifo Group Munich.
  2. Gersbach, Hans & Schneider, Maik, 2012. "Tax Contracts and Elections," CEPR Discussion Papers 9054, C.E.P.R. Discussion Papers.
  3. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts, party bargaining, and government formation," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 173-192.
  4. Hans Gersbach & Markus Müller, 2006. "Elections, Contracts and Markets," CER-ETH Economics working paper series 06/56, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  5. Gersbach, Hans & Liessem, Verena, 2005. "Re-election Threshold Contracts in Politics," CEPR Discussion Papers 5175, C.E.P.R. Discussion Papers.
  6. Hans Gersbach, 2004. "Competition of Politicians for Incentive Contracts and Elections," Public Choice, Springer, vol. 121(1), pages 157-177, October.
  7. Markus Müller, 2007. "Motivation of politicians and long-term policies," Public Choice, Springer, vol. 132(3), pages 273-289, September.
  8. Gersbach, Hans, 2008. "Contractual Democracy," CEPR Discussion Papers 6763, C.E.P.R. Discussion Papers.
  9. Verena Liessem, 2008. "Electoral competition, incentive contracts for politicians and unknown preferences," Social Choice and Welfare, Springer, vol. 30(1), pages 13-41, January.

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