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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. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    2. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR;CES;MSH, vol. 22, pages 385-430, April.
    3. 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.
    4. Gian Maria Milesi-Ferretti & Roberto Perotti & Massimo Rostagno, 2002. "Electoral Systems and Public Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 609-657.
    5. Siddhartha Bandyopadhyay & Kalyan Chatterjee, 2006. "Coalition Theory and its Applications: A Survey," Economic Journal, Royal Economic Society, vol. 116(509), pages 136-155, February.
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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.

    More about this item

    Keywords

    contract theory; government formation; voting;

    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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