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Tax Contracts and Government Formation

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  • Gersbach, Hans
  • Schneider, Maik

Abstract

We introduce tax contracts and examine how they affect government formation and welfare of voters in a democracy with proportional elections. A tax contract specifies a range of tax rates a party is committed to if in government. We develop a new model of party competition in which parties choose tax rates, public-good provision, and perks, and we show that the introduction of tax contracts has two effects: a perks effect and a policy-shift effect. The former plays a central role in societies with a low degree of political polarization, where it tends to reduce politicians' perks. If a society is highly polarized, tax contracts can yield more moderate political outcomes. However, there are also circumstances in which tax contracts induce more extreme policies.

Suggested Citation

  • Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7084
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    References listed on IDEAS

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    1. Arianna Degan & Antonio Merlo, 2006. "Do Voters Vote Sincerely?," PIER Working Paper Archive 06-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    3. Gian Maria Milesi-Ferretti & Roberto Perotti & Massimo Rostagno, 2002. "Electoral Systems and Public Spending," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 609-657.
    4. Siddhartha Bandyopadhyay & Kalyan Chatterjee, 2006. "Coalition Theory and its Applications: A Survey," Economic Journal, Royal Economic Society, vol. 116(509), pages 136-155, February.
    5. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition [‘Tax competition and economic geography’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 22(50), pages 386-430.
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    Cited by:

    1. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts and elections," European Economic Review, Elsevier, vol. 56(7), pages 1461-1479.
    2. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts, party bargaining, and government formation," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 173-192.
    3. Gersbach Hans, 2012. "Contractual Democracy," Review of Law & Economics, De Gruyter, vol. 8(3), pages 823-851, December.

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    More about this item

    Keywords

    Contract theory; Government formation; Voting;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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