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Dynamic Bargaining over Redistribution in Legislatures

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Alessandro Riboni

    (Ecole Polytechnique (Paris) and Université de Montréal)

Abstract
In modern democracies, public policies are negotiated among elected policymakers. Yet, most macroeconomic models abstract from post-election negotiation. In order to understand the determinants of redistribution, this paper studies legislative bargaining in a growth model where individuals are heterogeneous in their initial capital. Legislators with time-inconsistent preferences negotiate over a linear capital tax. As often the case in actual budget negotiations, we assume that the default option in every legislative session coincides with the previous period's tax. The endogeneity of the status quo forces policymakers to internalize how current decisions affect their bargaining power in future sessions. This channel has far-reaching implications on equilibrium tax levels and on how taxes vary with the institutional environment. On average we obtain capital taxes between 8% and 50%, depending on the distribution of legislators' wealth and on the specifics of the institutions. Finally, we show that political growth cycles arise: decades with low taxes and growing capital are followed by decades with high taxes and decreasing capital (and vice versa).

Suggested Citation

  • Facundo Piguillem & Alessandro Riboni, 2012. "Dynamic Bargaining over Redistribution in Legislatures," EIEF Working Papers Series 1206, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2012.
    • Handle: RePEc:eie:wpaper:1206
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Marina Azzimonti & Laura Karpuska & Gabriel Mihalache, 2023. "Bargaining Over Taxes And Entitlements In The Era Of Unequal Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 893-941, August.
    2. Saito, Yuta, 2015. "Capital Tax as a Consequence of Bargaining," MPRA Paper 65338, University Library of Munich, Germany.
    3. Facundo Piguillem & Alessandro Riboni, 2015. "Spending-Biased Legislators: Discipline Through Disagreement," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 901-949.
    4. Yanlei Ma, 2014. "Income Inequality, Political Polarization and Fiscal Policy Gridlock," 2014 Meeting Papers 547, Society for Economic Dynamics.
    5. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, vol. 167(C), pages 148-176.
    6. Zapal, Jan, 2020. "Simple Markovian equilibria in dynamic spatial legislative bargaining," European Journal of Political Economy, Elsevier, vol. 63(C).
    7. Baron, David P. & Bowen, T. Renee, 2013. "Dynamic Coalitions," Research Papers 2128, Stanford University, Graduate School of Business.
    8. Yuta Saito, 2019. "Political Representation and Legislative Bargaining over Redistribution," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(3), pages 251-262, August.
    9. T. Renee Bowen & Ying Chen & H?lya Eraslan, 2014. "Mandatory versus Discretionary Spending: The Status Quo Effect," American Economic Review, American Economic Association, vol. 104(10), pages 2941-2974, October.
    10. Marina Azzimonti & Gabriel P. Mihalache & Laura Karpuska, 2020. "Bargaining over Taxes and Entitlements," NBER Working Papers 27595, National Bureau of Economic Research, Inc.
    11. Tasos Kalandrakis, 2016. "Pareto efficiency in the dynamic one-dimensional bargaining model," Journal of Theoretical Politics, , vol. 28(4), pages 525-536, October.
    12. Hülya Eraslan & Kirill S. Evdokimov & Jan Zápal, 2022. "Dynamic Legislative Bargaining," Springer Books, in: Emin Karagözoğlu & Kyle B. Hyndman (ed.), Bargaining, chapter 0, pages 151-175, Springer.
    13. Marina Azzimonti & Laura Karpuska & Gabriel Mihalache, 2020. "Bargaining over Mandatory Spending and Entitlements," Department of Economics Working Papers 20-02, Stony Brook University, Department of Economics.
    14. Saito, Yuta, 2016. "Dynamic Bargaining over Redistribution with Endogenous Distribution of Political Power," MPRA Paper 71130, University Library of Munich, Germany.

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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H00 - Public Economics - - General - - - General

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