Working Paper: CEPR ID: DP9054
Authors: Hans Gersbach; Maik Schneider
Abstract: In this paper we examine the impact of tax contracts, a novel instrument, on elections, policies, and welfare. We consider a political game in which three parties compete to form the government and voters may behave strategically. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambiguously improve the welfare of the median voter.
Keywords: Elections; Government Formation; Political Contracts; Tax Promise
JEL Codes: D72; D82; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax contracts (H26) | moderate policy platforms (D72) |
| tax contracts (H26) | lower perks (H55) |
| tax contracts (H26) | improve welfare of median voter (D69) |
| tax contracts (H26) | reduce likelihood of grand coalitions (D79) |
| reduce likelihood of grand coalitions (D79) | lower perks (H55) |
| tax contracts (H26) | moderate outcomes (I12) |
| moderate outcomes (I12) | improve welfare of median voter (D69) |