Exploiting the 'Bare Necessities': Unemployment, Redistribution and Party-System Fragmentation
83 Pages Posted: 8 Aug 2013
Date Written: 2012
We depart from previous literature (e.g. Barro 1996; Alesina 1987) that has studied the effect of political institutions on economic outcomes and explore systematically the reverse direction of this relationship: the economic origins of party-system structure and electoral fragmentation. We build a multi-party model of redistributive politics with office and policy-motivated parties that compete in two dimensions (economic and social policies) to study the effect of economic inequality on party-system structure and electoral fragmentation (distribution of electoral power among parties). We uncover a non-monotonic relationship between unemployment and fragmentation that protest and retrospectvive voting theories so far ignored. We show how big parties can capitalize electorally on unemployment by exploiting redistribution to woo the unemployed who are relatively more willing to switch their votes in response to more generous transfers. The two necessary and sufficient conditions are: i) the existence of an effective redistribution mechanism; ii) the lack of institutional checks and balances that can restrict electorally motivated redistribution by dominant parties. We confirm empirically this non-monotonic relationship with data from OECD. We show that institutional constraints are a double-edged knife: they lead to more electoral power-sharing but also increase electoral support for extremists. Our results point to the limitations of inclusive economic and political institutions by highlighting the opportunistic motivations (special interest politics) for redistribution.
Keywords: electoral fragmentation, unemployment, redistributive politics, taxation, public spending, economic voting, instrumental variables, institutional constraints
JEL Classification: C23, C26, D72, H23, H50, H60, J68
Suggested Citation: Suggested Citation