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Dynamic Bargaining over Redistribution in Legislatures

Listed author(s):
  • Alessandro Riboni

    (University of Montreal)

  • Facundo Piguillem

    (Einaudi Institute for Economic and Finance(EIEF))

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).

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File URL: https://economicdynamics.org/meetpapers/2011/paper_1320.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1320.

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Date of creation: 2011
Handle: RePEc:red:sed011:1320
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
  2. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, taxes, and the median voter," Working Paper Series WP-06-02, Federal Reserve Bank of Chicago.
  3. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," Discussion Papers 08-051, Stanford Institute for Economic Policy Research.
  4. Facundo Piguillem & Anderson Schneider, 2013. "Heterogeneous Labor Skills, The Median Voter and Labor Taxes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 332-349, April.
  5. Marco Battaglini & Stephen Coate, 2007. "Inefficiency in Legislative Policymaking: A Dynamic Analysis," American Economic Review, American Economic Association, vol. 97(1), pages 118-149, March.
  6. John Duggan & Tasos Kalandrakis, 2009. "A Newton Collocation Method for Solving Dynamic Bargaining Games," Wallis Working Papers WP60, University of Rochester - Wallis Institute of Political Economy.
  7. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
  8. Marco Battaglini & Stephen Coate, 2008. "Fiscal Policy over the Real Business Cycle: A Positive Theory," NBER Working Papers 14047, National Bureau of Economic Research, Inc.
  9. Alessandro Riboni & Francisco J. Ruge-Murcia, 2010. "Monetary Policy by Committee: Consensus, Chairman Dominance, or Simple Majority?," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 363-416.
  10. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
  11. Marco Bassetto, 1999. "Political economy of taxation in an overlapping-generations economy," Discussion Paper / Institute for Empirical Macroeconomics 133, Federal Reserve Bank of Minneapolis.
  12. Piketty, Thomas & Saez, Emmanuel, 2012. "A Theory of Optimal Capital Taxation," CEPR Discussion Papers 8946, C.E.P.R. Discussion Papers.
  13. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  14. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  15. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
  16. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
  17. Alessandro Riboni, 2010. "Committees As Substitutes For Commitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 213-236, 02.
  18. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
  19. Kalandrakis, Anastassios, 2004. "A three-player dynamic majoritarian bargaining game," Journal of Economic Theory, Elsevier, vol. 116(2), pages 294-322, June.
  20. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers 1233, Society for Economic Dynamics.
  21. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
  22. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, vol. 69(6), pages 1491-1518, November.
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