A Bargaining Theory of Inefficient Redistribution Policies

Abstract

When two policies are available to achieve the same goal why is the relatively inefficient one often observed? We address this question in the context of policies used to redistribute income towards special interest groups (SIGs) where in the first stage the constraints on policy instruments are chosen and in the second the government bargains with SIGs over the level of the available policies. Restrictions on the use of efficient policies and the use of inefficient ones reduce the surplus over which SIGs and governments can bargain but it also improves the government's bargaining position thus increasing its share of the surplus. The positive effect for the government dominates under plausible conditions. Inefficient policies are the equilibrium outcome under alternative policy selection mechanisms, e.g., election of policymakers and bargaining between SIGs and the government. The model also explains the coexistence of transfer policies. Moreover, we show why a weak government is more likely to choose the inefficient transfer and discuss how this result may be tested.

A Theory of Small Campaign Contributions

“…EMILY is an acronym for Early Money is Like Yeast, i.e. it makes the dough rise: 28 early and large contributions allow a campaign to "get o¤ the ground".…”

“…and where  0 captures how much the large donor prefers  over  before any policy favor, and captures the sensitivity of the utility di¤erential to   (it can, for instance, represent the bargaining power of the in ‡uence-buying donor, as studied inDrazen and Limão 2008).A key implication of in ‡uence buying is that the induced policy distortions happen at the expense of the rest of the electorate. Formally, the value   that small  donors put…”

Gridlock and inefficient policy instruments

“…Whereas the Coate and Morris () and Glaeser and Ponzetto () accounts rest on asymmetric information, Acemoglu and Robinson () generate policy inefficiency from a model in which distortionary transfer payments are designed to counter declining political support and influence. Tullock (), Grossman and Helpman (), Becker and Mulligan (), and Drazen and Limao () argue that any resource transfer increases wasteful lobbying (rent‐seeking) activity. By committing itself to inefficient transfers, the government can reduce the level of wasteful lobbying.…”

Policy choice: Theory and evidence from commitment via international trade agreements

“…More specifically, we build on Drazen and Limão (2008) who provide a theory of policy choice where the government bargains with SIGs over the level of a lump-sum transfer and/or production subsidy. One of their key insights is that the government can benefit from constraints on the relatively efficient policy because while they reduce the total surplus they increase the government's share.…”