Redistributive Politics
Inefficient outcomes

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. In Discussion Paper No. 1056, Research Associate Avinash Dixit and John Londregan find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome. The premise of this paper is that the political process redistributes income on the basis of political characteristics and not on the basis of economic decisions.

To achieve economically efficient outcomes, it is necessary that those making inefficient choices are not given offsetting transfers. But the political process distributes income on the basis of political characteristics that are generally different from the economic characteristics rewarded by the market. The authors identify circumstances in which the inefficient choosers have desirable political characteristics, and are therefore immune from threats of having to face the economic consequences of their choices. The politics of redistribution may also play a role in other inefficient income redistribution schemes, such as the use of agricultural subsidies, and disaster aid for flood victims used to reconstruct housing in areas subject to recurrent inundation. What is fundamental to these processes is not the absence of public information or organization, but the inability of politicians to commit to ignore people's political characteristics.

Redistributive Politics and Economic Efficiency
Avinash Dixit and John Londregan