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Distributional conflict in small open economies

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  • Schäfer, Andreas
  • Steger, Thomas

Abstract

We aim at a better understanding of the inefficiencies resulting from distributional conflict in small open economies. To this end, a general equilibrium model with the following characteristics is set up: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The overall distributional-conflict inefficiency is decomposed into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) indicates that the distributional-conflict inefficiency may cause a substantial output loss.

Suggested Citation

  • Schäfer, Andreas & Steger, Thomas, 2013. "Distributional conflict in small open economies," Research in Economics, Elsevier, vol. 67(4), pages 355-367.
  • Handle: RePEc:eee:reecon:v:67:y:2013:i:4:p:355-367
    DOI: 10.1016/j.rie.2013.09.006
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