Dynamic Bargaining Over Redistribution in Legislatures

38 Pages Posted: 21 Jun 2013

See all articles by Facundo Piguillem

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF)

Alessandro Riboni

Ecole Polytechnique, Paris - Laboratoire d'Econometrie

Date Written: December 20, 2012

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).

Keywords: Redistribution, Time Consistency, Capital taxes, Legislative Bargaining, Markov- perfect Equilibria, Political Growth Cycles

JEL Classification: E6, H0

Suggested Citation

Piguillem, Facundo and Riboni, Alessandro, Dynamic Bargaining Over Redistribution in Legislatures (December 20, 2012). Available at SSRN: https://ssrn.com/abstract=2282406 or http://dx.doi.org/10.2139/ssrn.2282406

Facundo Piguillem (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

Alessandro Riboni

Ecole Polytechnique, Paris - Laboratoire d'Econometrie ( email )

1 rue Descartes
Paris, 75005
France

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