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Discussion Paper Details

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Title: Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies

Author(s): Allan Drazen and Nuno Limão

Publication Date: August 2003

Keyword(s): bargaining, caps, inefficient transfers, lobbies and special interests

Programme Area(s): International Macroeconomics and Public Economics

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.

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Bibliographic Reference

Drazen, A and Limão, N. 2003. 'Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4007