Working Paper: CEPR ID: DP9745
Authors: Philippe de Donder; John E. Roemer
Abstract: We study how rich shareholders can use their economic power to deregulate firms that they own, thus skewing the income distribution towards themselves. Agents differ in productivity and choose how much labor to supply. High productivity agents also own shares in the productive sector and thus earn capital income. All vote over a linear tax rate on (labor and capital) income whose proceeds are redistributed lump sum. Capital owners also lobby in order to ease the price cap imposed on the private firm. We solve analytically for the Kantian equilibrium of this lobbying game together with the majority voting equilibrium over the tax rate, and we perform simulations. We obtain numerically that, as the capital income distribution becomes more concentrated among the top productivity individuals, their increased lobbying effort generates efficiency as well as equity costs, with lower labor supply and lower average utility levels in society.
Keywords: Kantian equilibrium; lobbying; political economy; regulatory capture
JEL Codes: D72; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Concentrated capital income (D33) | Increased lobbying efforts (D72) |
| Increased lobbying efforts (D72) | Decreased labor supply (J29) |
| Increased lobbying efforts (D72) | Higher output prices (D49) |
| Higher output prices (D49) | Decreased labor supply (J29) |
| Concentrated capital income (D33) | Decreased average utility levels (D11) |
| Increased concentration of capital income (D33) | Decreased utility of labor income earners (J49) |