Exploiting the Bare Necessities: Unemployment, Redistribution and Party-System Fragmentation
83 Pages Posted: 8 Aug 2013
Date Written: 2013
Previous literature has studied the effect of political institutions on economic outcomes. We construct a multi-party model of redistributive politics with office and policy motivated parties that compete in two dimensions (economic and social policies) to explore the opposite direction of this relationship: the economic origins of party-system and electoral fragmentation (distribution of electoral power among parties). We uncover a U-shaped relationship between unemployment and fragmentation. We show that when institutional arrangements that restrict electorally motivate redistribution are absent, large parties can capitalize on this electorally and woo the unemployed, who are relatively more willing to switch their votes in response to generous redistribution. Hence, in contrast to protest or retrospective voting theories, fragmentation initially decreases in unemployment. By highlighting the electoral motivations (special interest politics) for redistribution, we show the limitations of inclusive economic and political institutions: they can lead to either less power-sharing or increased support for extremists.
Keywords: electoral fragmentation, unemployment, redistributive politics, taxation, public spending, economic voting, instrumental variables, institutional constraints
JEL Classification: C23, D72, H23
Suggested Citation: Suggested Citation