Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies
University of Maryland - Department of Economics; Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
University of Maryland - Department of Economics
CEPR Discussion Paper No. 4007
We consider a bargaining model of the interaction between a government and interest groups in which, unlike existing models, neither side is assumed to have all the bargaining power. The government will then find it optimal to constrain itself in the use of transfer policies to improve its bargaining position. In a model of redistribution to lobbies, the government will find it optimal to cap the size of lump-sum transfers it makes below the unconstrained equilibrium level. One implication is that with the optimal cap on efficient subsidies in place, less efficient subsidies will be used for redistribution even when they serve no economic function. We thus offer an alternative theory that explains why governments may optimally choose to restrict efficient lump-sum transfers to interest groups and partially replace them with relatively less efficient transfers.
Number of Pages in PDF File: 38
Keywords: Inefficient transfers, lobbies, special interests, bargaining, caps
JEL Classification: C70, D70, F13, H23working papers series
Date posted: September 24, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 1.016 seconds