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A Bargaining Theory Of Inefficient Redistribution Policies

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  • Allan Drazen
  • Nuno Limão

Abstract

When two policies are available to achieve the same goal why is the relatively inefficient one often observed? We address this question in the context of policies used to redistribute income towards special interest groups (SIGs) where in the first stage the constraints on policy instruments are chosen and in the second the government bargains with SIGs over the level of the available policies. Restrictions on the use of efficient policies and the use of inefficient ones reduce the surplus over which SIGs and governments can bargain but it also improves the government's bargaining position thus increasing its share of the surplus. The positive effect for the government dominates under plausible conditions. Inefficient policies are the equilibrium outcome under alternative policy selection mechanisms, e.g., election of policymakers and bargaining between SIGs and the government. The model also explains the coexistence of transfer policies. Moreover, we show why a weak government is more likely to choose the inefficient transfer and discuss how this result may be tested. Copyright ©2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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  • Allan Drazen & Nuno Limão, 2008. "A Bargaining Theory Of Inefficient Redistribution Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 621-657, May.
  • Handle: RePEc:ier:iecrev:v:49:y:2008:i:2:p:621-657
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    1. repec:eee:inecon:v:108:y:2017:i:c:p:226-242 is not listed on IDEAS
    2. Glaeser, Edward L. & Ponzetto, Giacomo A.M., 2014. "Shrouded costs of government: The political economy of state and local public pensions," Journal of Public Economics, Elsevier, vol. 116(C), pages 89-105.
    3. Aparajita Goyal & John Nash, 2017. "Reaping Richer Returns," World Bank Publications, The World Bank, number 25996.
    4. Bombardini, Matilde & Trebbi, Francesco, 2011. "Votes or money? Theory and evidence from the US Congress," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 587-611, August.
    5. Limão, Nuno & Tovar, Patricia, 2011. "Policy choice: Theory and evidence from commitment via international trade agreements," Journal of International Economics, Elsevier, vol. 85(2), pages 186-205.
    6. Jørgen Andersen, 2012. "Costs of taxation and the size of government," Public Choice, Springer, vol. 153(1), pages 83-115, October.
    7. Amihai GLAZER & Stef PROOST, 2008. "Capital-intensive projects induce more effort than labor-intensive projects," Working Papers Department of Economics ces0831, KU Leuven, Faculty of Economics and Business, Department of Economics.

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