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Tax Contracts and Elections

In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambigously improve the welfare of the median voter.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/123.

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Length: 50 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:eth:wpswif:09-123
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  1. Michele Polo, . "Electoral competition and political rents," Working Papers 144, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  13. Gersbach, Hans & Schneider, Maik, 2008. "Tax Contracts and Government Formation," CEPR Discussion Papers 7084, C.E.P.R. Discussion Papers.
  14. Gersbach, Hans & Schneider, Maik T., 2012. "Tax contracts and elections," European Economic Review, Elsevier, vol. 56(7), pages 1461-1479.
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  18. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
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