Working Paper: NBER ID: w10375
Authors: Allan Drazen; Nuno Limo
Abstract: We present a bargaining model of the interaction between a government and interest groups in which, unlike most existing models, neither side is assumed to have all the bargaining power. The government finds 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 finds it optimal to cap the size of lump-sum transfers it makes below the unconstrained equilibrium level. With a binding cap on efficient subsidies in place, less efficient subsidies will be used for redistribution even when they serve no economic function. Analogously, if it must choose either efficient or inefficient transfers, it may find it optimal to forego use of the former if its bargaining power relative to the lobby is sufficiently low. Even if the lobby can bargain over the type of redistribution policy with the government, the inefficient policy may still be used in equilibrium. If policymakers are elected, rational fully informed voters may choose a candidate who implements the inefficient policy over one who would implement the efficient policy and may prefer the candidate with the lower weight on voter welfare We thus offer an alternative theory that explains why governments may optimally choose to restrict efficient lump-sum transfers to interest groups and replace them with relatively less efficient transfers.
Keywords: government; inefficient redistribution; bargaining theory; interest groups
JEL Codes: D7; F13; C70; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government imposes a binding cap on efficient lumpsum transfers (H19) | Government's bargaining position improves (H69) |
| Government's bargaining position improves (H69) | Use of less efficient transfers for redistribution (F16) |
| Low bargaining power of government relative to SIG (H19) | Government opts for inefficient policies in equilibrium (D59) |
| Government opts for inefficient policies in equilibrium (D59) | Loss in bargaining surplus from switching to inefficient policy is small (D61) |