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

Allan Drazen and Limão, Nuno
Authors registered in the RePEc Author Service: Nuno M. Limão

No 4007, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Inefficient transfers; Lobbies; Special interests; Bargaining; Caps (search for similar items in EconPapers)
JEL-codes: C70 D70 F13 H23 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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