Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies

38 Pages Posted: 24 Sep 2003

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nuno Limão

University of Maryland - Department of Economics

Date Written: August 2003

Abstract

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.

Keywords: Inefficient transfers, lobbies, special interests, bargaining, caps

JEL Classification: C70, D70, F13, H23

Suggested Citation

Drazen, Allan and Limão, Nuno, Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies (August 2003). CEPR Discussion Paper No. 4007. Available at SSRN: https://ssrn.com/abstract=448740

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

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