Political dynamics, public goods and private spillovers

Timothy Kam, Tina Kao and Yingying Lu

Journal of Economic Behavior & Organization, 2020, vol. 177, issue C, 237-254

Abstract: Positive and negative spillovers from private activities onto aggregate economic outcomes are empirically significant. How might politics interact with private investment incentives and their externalities? Our theory connects politics to policies which distort private spillovers. This has implications for empirical identification. In our model, for large negative externality there is a unique equilibrium with perpetually high tax rates and majority poor voters. This is a consequence of political manipulation that anticipates private spillovers on forward-looking investment decisions. When positive spillovers are sufficiently large, individuals can coordinate on policies that encourage private investment. This sustains an equilibrium with perpetually low tax rates and majority rich voters. The resulting multiple equilibria can be used to interpret existing conundrums in empirical findings. We can also rationalize an observed cross-country empirical regularity in terms of public funding for knowledge goods and income inequality.

Keywords: Environmental/Knowledge public good; Private spillovers; Markovian voting; Equilibrium regimes; Redistribution (search for similar items in EconPapers)
JEL-codes: D72 D78 E62 H21 H23 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:177:y:2020:i:c:p:237-254

DOI: 10.1016/j.jebo.2020.06.007

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