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Dynamic Bargaining over Redistribution in Legislatures

Author

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  • Alessandro Riboni

    (University of Montreal)

  • Facundo Piguillem

    (Einaudi Institute for Economic and Finance(EIEF))

Abstract

This paper analyzes the standard Neoclassical growth model where agents are heterogeneous in their initial wealth. Wealth can be taxed in order to finance equal lump-sum transfers. We consider a representative democracy where elected officials select the current capital tax by playing a legislative bargaining game. Specifically, one member of the legislature makes a take-it-or-leave-it proposal and decisions pass by majority rule. In case of rejection of the proposal, the capital tax that was voted in the previous period (the status quo) is kept in place for one more period. A key feature of the bargaining game is that when looking at current payoffs both the agenda setter and the legislature have aligned preferences: their most preferred static policy is full taxation. However, the strength of these preferences differ. We show that the fear of ending in a high taxation equilibrium sustains levels of capital taxes and redistribution that are empirically reasonable. The endogeneity of the status quo is a crucial ingredient which disciplines legislators and reduces commitment problems. We also find that higher wealth inequality does not necessarily increase the size of government (the share of income redistributed).

Suggested Citation

  • Alessandro Riboni & Facundo Piguillem, 2011. "Dynamic Bargaining over Redistribution in Legislatures," 2011 Meeting Papers 1320, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1320
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    References listed on IDEAS

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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, vol. 104(10), pages 2941-2974, October.
    4. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, vol. 167(C), 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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