Political economics and public finance
In: Handbook of Public Economics
Observed fiscal policy varies greatly across time and countries. How can we explain this variation? This paper surveys the recent literature that has tried to answer this question. We adopt a unified approach in portraying public policy as the equilibrium outcome of an explicitly specified political process. We divide the material into three parts. In Part I, we focus on median-voter equilibria that apply to policy issues where disagreement between voters is likely to be one-dimensional. We thus study the general redistributive programs, typical of the modern welfare state: redistribution between rich and poor, young and old, employed and unemployed, and labor and capital. In Part II we study special-interest politics. Here, the policy problem is multi-dimensional and we focus on specific political mechanisms: we study legislative bargaining, lobbying, and electoral competition, as well as the possible interactions between these different forms of political activity. Finally, in Part III we deal with "comparative politics", namely policy choice under alternative political constitutions. Here, we model the rationale for separation of powers; we also contrast stylized features of majoritarian and proportional electoral rules, as well as congressional and parliamentary political regimes, focusing on their implications for rent extraction by politicians, redistribution and public goods provision.
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