Working Paper: CEPR ID: DP4007
Authors: Allan Drazen; Nuno Limo
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: bargaining; caps; inefficient transfers; lobbies; special interests
JEL Codes: C70; D70; F13; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal cap on transfers (H87) | Improved government bargaining position (H19) |
| Cap on subsidies (H23) | Use of less efficient transfers (F16) |
| Improved government bargaining position (H19) | Use of less efficient transfers (F16) |