Working Paper: CEPR ID: DP1056
Authors: Avinash Dixit; John Londregan
Abstract: The political process often compensates the losers from technical change or international competition in an economically inefficient way, namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses. We find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome. To achieve economically efficient outcomes, it is necessary that those making economically inefficient choices are not given offsetting transfers. But the political process distributes income on the basis of political characteristics, which are in general different from the economic characteristics that are rewarded by the market. We identify circumstances in which the inefficient choosers have desirable political characteristics, and therefore are immune from threats of having to face the economic consequences of their choices.
Keywords: interest groups; redistribution; occupation choice; efficiency
JEL Codes: D72; F13; H21; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political characteristics of individuals (D72) | economic characteristics rewarded by the market (P42) |
| political process compensates losers from economic changes (D72) | inefficient compensation leads to workers remaining in declining industries (J65) |
| inefficient compensation (J33) | lock-in effect for workers (J63) |
| inability of politicians to commit to ignoring political characteristics (D72) | lock-in effect for workers (J63) |
| transaction costs and inability of political process to make credible promises (D72) | inefficiencies in resource allocation (D61) |