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Dynamic Bargaining over Redistribution in Legislatures

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Alessandro Riboni

    (Ecole Polytechnique (Paris) and Université de Montréal)

Abstract

In modern democracies, public policies are negotiated among elected policymakers. Yet, most macroeconomic models abstract from post-election negotiation. In order to understand the determinants of redistribution, this paper studies legislative bargaining in a growth model where individuals are heterogeneous in their initial capital. Legislators with time-inconsistent preferences negotiate over a linear capital tax. As often the case in actual budget negotiations, we assume that the default option in every legislative session coincides with the previous period's tax. The endogeneity of the status quo forces policymakers to internalize how current decisions affect their bargaining power in future sessions. This channel has far-reaching implications on equilibrium tax levels and on how taxes vary with the institutional environment. On average we obtain capital taxes between 8% and 50%, depending on the distribution of legislators' wealth and on the specifics of the institutions. Finally, we show that political growth cycles arise: decades with low taxes and growing capital are followed by decades with high taxes and decreasing capital (and vice versa).

Suggested Citation

  • Facundo Piguillem & Alessandro Riboni, 2012. "Dynamic Bargaining over Redistribution in Legislatures," EIEF Working Papers Series 1206, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2012.
  • Handle: RePEc:eie:wpaper:1206
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    References listed on IDEAS

    as
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    Cited by:

    1. Saito, Yuta, 2015. "Capital Tax as a Consequence of Bargaining," MPRA Paper 65338, University Library of Munich, Germany.
    2. Facundo Piguillem & Alessandro Riboni, 2015. "Spending-Biased Legislators: Discipline Through Disagreement," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 901-949.
    3. T. Renee Bowen & Ying Chen & H?lya Eraslan, 2014. "Mandatory versus Discretionary Spending: The Status Quo Effect," American Economic Review, American Economic Association, pages 2941-2974.
    4. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, pages 148-176.
    5. Yanlei Ma, 2014. "Income Inequality, Political Polarization and Fiscal Policy Gridlock," 2014 Meeting Papers 547, Society for Economic Dynamics.
    6. Baron, David P. & Bowen, T. Renee, 2013. "Dynamic Coalitions," Research Papers 2128, Stanford University, Graduate School of Business.
    7. Jan Zapal, 2014. "Simple Markovian Equilibria in Dynamic Spatial Legislative Bargaining," CERGE-EI Working Papers wp515, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    8. Saito, Yuta, 2016. "Dynamic Bargaining over Redistribution with Endogenous Distribution of Political Power," MPRA Paper 71130, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H00 - Public Economics - - General - - - General

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