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

48 Pages Posted: 30 Mar 2004

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: March 2004

Abstract

We present a bargaining model of the interaction between a government and interest groups in which, unlike most existing models, neither side is assumed to have all the bargaining power. The government finds 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 finds it optimal to cap the size of lump-sum transfers it makes below the unconstrained equilibrium level. With a binding cap on efficient subsidies in place, less efficient subsidies will be used for redistribution even when they serve no economic function. Analogously, if it must choose either efficient or inefficient transfers, it may find it optimal to forego use of the former if its bargaining power relative to the lobby is sufficiently low. Even if the lobby can bargain over the type of redistribution policy with the government, the inefficient policy may still be used in equilibrium. If policymakers are elected, rational fully informed voters may choose a candidate who implements the inefficient policy over one who would implement the efficient policy and may prefer the candidate with the lower weight on voter welfare We thus offer an alternative theory that explains why governments may optimally choose to restrict efficient lump-sum transfers to interest groups and replace them with relatively less efficient transfers.

Suggested Citation

Drazen, Allan and Limão, Nuno, Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution (March 2004). NBER Working Paper No. w10375. Available at SSRN: https://ssrn.com/abstract=519164

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
26
Abstract Views
640
PlumX Metrics