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Distributional conflict in small open economies

Andreas Schäfer and Thomas Steger ()

Research in Economics, 2013, vol. 67, issue 4, 355-367

Abstract: We aim at a better understanding of the inefficiencies resulting from distributional conflict in small open economies. To this end, a general equilibrium model with the following characteristics is set up: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The overall distributional-conflict inefficiency is decomposed into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) indicates that the distributional-conflict inefficiency may cause a substantial output loss.

Keywords: Distributional conflict; Time inconsistency; Strategic interaction; Heterogeneity (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.rie.2013.09.006

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