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Political competition and the (in)effectiveness of redistribution in a federation

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Abstract

We analyze political and economic conditions in which the effectiveness of public redistribution might be low in a federation. In our economy, the central government redistributes income while local governments provide a pro poor local public good. If local public spending falls as a response to the ex-post tax-transfer distribution of income engineered by the policy of the central government then public redistribution might be ineffective in redistributing welfare. In this paper we address this issue. Our main findings are: first, if the party of some local government represents a coalition of voters with labor earning abilities below the average earning ability of the economy and the aggregate net transfer from the redistributive program is negative for residents in the locality then local public spending falls in this district as a response to the redistributive policy of the central government. Second, if local governments of all districts are controlled by parties representing voters with sufficiently high marginal utilities of income and labor earning abilities below the nationwide average labor earning ability then public redistribution induces all local governments to reduce local public spending.

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  • Ikuho Kochi & Raúl Ponce Rodríguez, 2012. "Political competition and the (in)effectiveness of redistribution in a federation," Estudios Regionales en Economía, Población y Desarrollo. Cuadernos de Trabajo de la Universidad Autónoma de Ciudad Juárez. 10, Cuerpo Académico 41 de la Universidad Autónoma de Ciudad Juárez, revised 09 Dec 2012.
    • Handle: RePEc:cjz:ca41cj:10
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    1. Wittman, Donald A., 1973. "Parties as Utility Maximizers," American Political Science Review, Cambridge University Press, vol. 67(2), pages 490-498, June.
    2. Gravelle, Jane G & Kotlikoff, Laurence J, 1989. "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 749-780, August.
    3. John E. Roemer, 1997. "Political-economic equilibrium when parties represent constituents: The unidimensional case," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 14(4), pages 479-502.
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    1. Raúl A. Ponce Rodríguez & Ikuho Kochi & Luis E. Gutiérrez Casas, 2015. "The structure of political power and redistribution in economies with multiple governments," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 30(2), pages 269-303.

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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