DP1056 Redistributive Politics and Economic Efficiency

Author(s): Avinash K Dixit, John Londregan
Publication Date: November 1994
Keyword(s): Efficiency, Interest Groups, Occupation Choice, Redistribution
JEL(s): D72, F13, H21, J24
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1056

The political process often compensates the losers from technical change or international competition in an economically inefficient way, namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses. We find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome. To achieve economically efficient outcomes, it is necessary that those making economically inefficient choices are not given offsetting transfers. But the political process distributes income on the basis of political characteristics, which are in general different from the economic characteristics that are rewarded by the market. We identify circumstances in which the inefficient choosers have desirable political characteristics, and therefore are immune from threats of having to face the economic consequences of their choices.