DOCSLIB.ORG

A Review Essay on Persson and Tabellini's

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
A Review Essay on Persson and Tabellini's de05_Article3 11/16/05 3:59 PM Page 1025 Journal of Economic Literature Vol. XLIII (December 2005), pp. 1025-1048 Constitutions, Politics, and Economics: A Review Essay on Persson and Tabellini’s The Economic Effects of Constitutions ∗ DARON ACEMOGLU In this essay, I review the new book by Torsten Persson and Guido Tabellini, The Economic Effects of Constitutions, which investigates the policy and economic con- sequences of different forms of government and electoral rules. I also take advantage of this opportunity to discuss the advantages and disadvantages of a number of popu- lar empirical strategies in the newly emerging field of comparative political economy. 1. Introduction is an excellent introduction to basic models of political decision-making and their impli- olitical economy has now emerged as an cations for economic outcomes. The objec- active and flourishing subdiscipline of P tive of their new book, The Economic Effects economics, with the ambition of offering of Constitutions, also published by MIT insights into the causes of the large cross- Press, is to continue where the first book left country differences in major economic out- off, and confront theory with data. comes and policies.1 Torsten Persson and The book deserves enthusiastic reception Guido Tabellini deserve much of the credit for a number of reasons, including the for making this happen. Their book, Political authors’ role in advancing the political Economics: Explaining Economic Policy, economy research program, its ambitious which was published by MIT Press in 2000, objectives, its careful scholarship, and the long list of findings that come out of the ∗ Acemoglu: Massachusetts Institute of Technology. I research methodology. Equally, however, thank Joshua Angrist, Victor Chernozukov, Roger Gordon, such a bold attempt at confronting theory Chad Jones, Torsten Persson, Guido Tabellini, Simon Johnson, and Pierre Yared for useful comments and Pierre with data requires a critical look. This moti- Yared for excellent research assistance. vates my review of their new book, focusing 1 While there is renewed interest in political econo- on the identification issues that arise both my, in large part in the context of understanding the sources of large cross-country differences in policies, in this context and more generally in recent institutions and economic performance, this work is pre- political economy research. ceded by the important results of the earlier “social This review essay is organized as follows. choice” literature. David Austen-Smith and Jeffrey S. Banks (2000) provide an excellent introduction to the Section 2 introduces the context and the major results in this literature. objectives of Persson and Tabellini’s new 1025 de05_Article3 11/16/05 3:59 PM Page 1026 1026 Journal of Economic Literature, Vol. XLIII (December 2005) Policy Preferences Economic Constitutional Outcomes Rules Markets Political Outcomes Policy Decisions Figure 1: The Policymaking Process (Figure 1.1, page 3) book. Section 3 provides a detailed discus- the rental market works. The major advance sion of econometric issues and identification that came with political economy is encapsu- problems that Persson and Tabellini have lated in a new question: why do policies dif- rightly emphasized in their work. Section 4 fer over time, across countries and more discusses the major empirical results of the broadly across polities? Why, for example, do book. Sections 5–8 discuss a number of some governments impose rent control problems and challenges facing empirical while others do not intervene in rental mar- work in political economy, and reevaluate kets. Before, we had no better answer than Persson and Tabellini’s contribution in this “(some) politicians just don’t get it.” Political light. Sections 9 and 10 discuss two sets of economy is about developing better answers. topics that I view as important areas for This task requires a framework for think- future research in political economy. ing about why policies differ across coun- tries. This is what much of political economy 2. Background and Objectives does. Starting with Kenneth J. Arrow’s cele- brated (im)possibility theorem (Arrow 1963, Persson and Tabellini (henceforth PT) set Duncan Black 1948), Anthony Downs’s the scene with figure 1.1 in their book, median voter result (Downs 1957, Harold which I replicate here. The box on the left is Hotelling 1929), and George J. Stigler’s work where much of economics falls. We have a on regulation (Stigler 1970, 1972), the cen- good, though far from perfect, understand- tral working hypothesis has been that ing of how different organizations of markets agents—as voters, lobbyists, revolutionaries, lead to different economic outcomes. But politicians—have induced preferences over why are markets organized differently in dif- policies. This means that they understand ferent societies? Economists and other that different policies will map into different social scientists have long realized the outcomes, and consequently their prefer- importance of “policies.” If the government ences over policies are shaped by their pref- imposes rent control, this will impact how erences over the outcomes that will be de05_Article3 11/16/05 3:59 PM Page 1027 Acemoglu: Constitutions, Politics, and Economics: A Review 1027 induced by the policies.2 Political economy comparative political economy more specif- is then about understanding how these ically. What makes this work even more induced preferences over policies are aggre- impressive is the fact that the authors are gated. The recent work in political economy investigating predictions of their earlier is also part of this research program, but models. more explicitly investigates why collective In reality, PT have an even more ambi- decisions and policies differ across societies. tious goal. Many scholars attempt to docu- Much work in political science, on the ment a set of correlations in the data that are other hand, as succinctly captured by the box related to predictions of existing models. on the right in Persson and Tabellini’s figure Instead, PT are interested in more than cor- is about how different political procedures relations. They undertake the ambitious task lead to different political outcomes. Let us of identifying the causal effects of the form refer to political procedures as “political of political institutions on economic and institutions” and make the link between political outcomes. They write on page 7: political outcomes and policies. This gives us “Our ultimate goal is to draw conclusions a natural framework for thinking about why about the causal effect of constitutions on different societies choose different policies— specific policy outcomes. We would like to they have different political institutions. answer questions like the following: if the PT’s first book, Political Economics, devel- United Kingdom were to switch its electoral oped various models of collective decision- rule from majoritarian to proportional, how making and derived predictions on how would this affect the size of its welfare state differences in political institutions translate or its budget deficits? If Argentina were to into differences of policies and economic abandon its presidential regime in favor of a outcomes. This new book is the next step to parliamentary form of government, would push this framework further by confronting this facilitate the adoption of sound policy its predictions with data. towards economic development?” Although this type of comparative analysis How would we get to the causal effects of has been vibrant in political science, there a set of political institutions on outcomes? are no systematic theoretical analyses deriv- PT have a well-specified strategy. First, ing precise predictions from micro-founded they focus on a subset of political institu- models to confront with data. Here PT are tions; the constitutionally determined form much more ambitious. They take the pre- of electoral rules and the form of govern- dictions of a set of theoretical models, in ment among democracies. This leaves out a particular, the probabilistic voting model of large part of political institutions, for exam- Assar Lindbeck and Jörgen Weibull (1987), ple, those that relate to whether a country extensively studied in their first book, and is a democracy or not, and thus a lot of an extended version of John Ferejohn’s interesting questions related to what (1986) model of politician accountability, makes constitutions credible in the first 3 studied in Persson, Gerard Roland, and place. Nevertheless, narrowing the scope Tabellini (1997, 2000), seriously. Although one can have qualms about the specific 3 See, for example, Avinash Dixit, Gene M. Grossman, assumptions that are important to derive and Faruk Gul (2000). This question perhaps is not first- order for PT because they focus on democracies that are predictions in these models, PT’s is the right “fully consolidated” and do not switch to dictatorship, and approach in social science in general, and in investigate how electoral rules affect policies within the democratic framework. Nevertheless, whether a society is a fully consolidated democracy is endogenous and poten- 2 This approach is referred to as “rational choice” in tially also depends on the form of government and elec- political science. To economists, it is the natural approach toral rules in democracy (see Acemoglu and Robinson without apologies. 2005 for a discussion). de05_Article3 11/16/05 3:59 PM Page 1028 1028
Load more

Recommended publications
  • The Econometric Society European Region Aide Mémoire
    The Econometric Society European Region Aide M´emoire March 22, 2021 1 European Standing Committee 2 1.1 Responsibilities . .2 1.2 Membership . .2 1.3 Procedures . .4 2 Econometric Society European Meeting (ESEM) 5 2.1 Timing and Format . .5 2.2 Invited Sessions . .6 2.3 Contributed Sessions . .7 2.4 Other Events . .8 3 European Winter Meeting (EWMES) 9 3.1 Scope of the Meeting . .9 3.2 Timing and Format . 10 3.3 Selection Process . 10 4 Appendices 11 4.1 Appendix A: Members of the Standing Committee . 11 4.2 Appendix B: Winter Meetings (since 2014) and Regional Consultants (2009-2013) . 27 4.3 Appendix C: ESEM Locations . 37 4.4 Appendix D: Programme Chairs ESEM & EEA . 38 4.5 Appendix E: Invited Speakers ESEM . 39 4.6 Appendix F: Winners of the ESEM Awards . 43 4.7 Appendix G: Countries in the Region Europe and Other Areas ........... 44 This Aide M´emoire contains a detailed description of the organisation and procedures of the Econometric Society within the European Region. It complements the Rules and Procedures of the Econometric Society. It is maintained and regularly updated by the Secretary of the European Standing Committee in accordance with the policies and decisions of the Committee. The Econometric Society { European Region { Aide Memoire´ 1 European Standing Committee 1.1 Responsibilities 1. The European Standing Committee is responsible for the organisation of the activities of the Econometric Society within the Region Europe and Other Areas.1 It should undertake the consideration of any activities in the Region that promote interaction among those interested in the objectives of the Society, as they are stated in its Constitution.
    [Show full text]
  • The Lucas Critique – Is It Really Relevant?
    Working Paper Series Department of Business & Management Macroeconomic Methodology, Theory and Economic Policy (MaMTEP) No. 7, 2016 The Lucas Critique – is it really relevant? By Finn Olesen 1 Abstract: As one of the founding fathers of what became the modern macroeconomic mainstream, Robert E. Lucas has made several important contributions. In the present paper, the focus is especially on his famous ‘Lucas critique’, which had tremendous influence on how to build macroeconomic models and how to evaluate economic policies within the modern macroeconomic mainstream tradition. However, much of this critique should not come as a total surprise to Post Keynesians as Keynes himself actually discussed many of the elements present in Lucas’s 1976 article. JEL classification: B22, B31 & E20 Key words: Lucas, microfoundations for macroeconomics, realism & Post Keynesianism I have benefitted from useful comments from Robert Ayreton Bailey Smith and Peter Skott. 2 Introduction In 1976, Robert Lucas published a contribution that since has had an enormous impact on modern macroeconomics. Based on the Lucas critique, the search for an explicit microfoundation for macroeconomic theory began in earnest. Later on, consensus regarding methodological matters between the New Classical and the New Keynesian macroeconomists emerged. That is, it was accepted that macroeconomics could only be done within an equilibrium framework with intertemporal optimising households and firms using rational expectations. As such, the representative agent was born. Accepting such a framework has of course not only theoretical consequences but also methodological ones as for instance pointed out by McCombie & Pike (2013). Not only should macroeconomics rest upon explicit and antiquated, although accepted, microeconomic axioms; macroeconomic theory also had to be formulated exclusively by use of mathematical modelling1.
    [Show full text]
  • Raising Children to Work Hard: Altruism, Work Norms and Social Insurance ∗
    RAISING CHILDREN TO WORK HARD: ALTRUISM, WORK NORMS AND SOCIAL INSURANCE ¤ Assar Lindbeck and Sten Nyberg February 28, 2006 Forthcoming in Quarterly Journal of Economics, 4, November 2006 Abstract Empirically, disincentive eects on work of generous welfare state arrange- ments tend to appear with a substantial time-lag. One explanation is that norms concerning work and benet dependency delay such eects. We model altruistic parents' economic incentives for instilling such work norms in their children. Anticipated economic support from parents may reduce work eort, and parental altruism makes threats to withdraw such support non-credible. Instilling norms mitigates this problem. However, generous social insurance arrangements tend to weaken parents' incentives to instill such norms in their children. We nd empirical support for this prediction. JEL Classication: Z13, D19, D64, H31. Keywords: Work norms, social insurance, altruism. ¤We are grateful for comments from Gary Becker, Alessandra Cassella, Torsten Persson, Michael Waldman, Jörgen W. Weibull and seminar participants at the EEA meeting in Lausanne, IIES Stockholm University, Uppsala University, the Research Institute of Industrial Economics Stockholm, SCASSS, SNS/CEPR Public Policy Symposium, Stockholm School of Economics, Swedish School of Economics and Business Administration, Helsinki, University of Munich and University of Sydney. We are also grateful for suggestions from two anonymous referees and the editor of this journal. Excellent empirical research assistance by Jose Mauricio Prado, Jr. is gratefully acknowledged. 1 I. Introduction In recent years, social scientists and politicians have expressed concern about disincentive eects on work of welfare-state arrangements, and related taxes on labor income, in Western Europe. The large reduction in per capita hours of work and the huge increase in the number of individuals of working age living on various government benets might be the most direct evidence of such eects.
    [Show full text]
  • The New Political Economy
    The New Political Economy Timothy Besley London School of Economics November 8, 2004 1 Introduction It is a great honour to give this year’sKeynes lecture. I have chosen as my subject the New Political Economy, a body of research and thinking that has ‡ourished in the past …fteen years or so at the interface between economics and politics. At the margin the New Political Economy reverses the split that occurred between the disciplines of economics and political science at the end of the nineteenth century. The aim of the New Political Economy is to understand important issues that arise in the policy sphere.1 It is not, as is occasionally hinted, an e¤ort by economists to colonize political science. Rather, the main concern is to extend the competence of economists to analyze issues that require some facility with economic and political decision making. This lecture is not in any sense a survey of the …eld. It is a highly selective and personal view of the motivation behind the …eld and some of the key themes that link the literature. Thus, it represents a manifesto presented in the hope that somebody who encounters these ideas for the …rst time here might be tempted to delve further into the literature and even contribute to it. This paper is based on the Keynes lecture delivered at the British Academy on October 13th 2004. I am indebted to Pete Boetkke, Mary Morgan and Torsten Persson for helpful comments on an earlier draft of this lecture and Steve Coate for numerous illuminating discussions.
    [Show full text]
  • Market Power and Regulation
    THE PRIZE IN ECONOMIC SCIENCES 2014 POPULAR SCIENCE BACKGROUND Market power and regulation Jean Tirole is one of the most infuential economists of our time. He has made important theoretical research contributions in a number of areas, but most of all he has clarifed how to understand and regulate industries with a few powerful frms. Tirole is awarded this year’s prize for his analysis of market power and regulation. Regulation is difficult Which activities should be conducted as public services and which should be left to private frms is a question that is always relevant. Many governments have opened up public monopolies to private stakeholders. This has applied to industries such as railways, highways, water, post and telecom- munications – but also to the provision of schooling and healthcare. The experiences resulting from these privatizations have been mixed and it has often been more difcult than anticipated to get private frms to behave in the desired way. There are two main difculties. First, many markets are dominated by a few frms that all infuence prices, volumes and quality. Traditional economic theory does not deal with this case, known as an oligopoly, instead it presupposes a single monopoly or what is known as perfect competition. The second difculty is that the regulatory authority lacks information about the frms’ costs and the quality of the goods and services they deliver. This lack of knowledge often provides regulated frms with a natural advantage. Before Tirole In the 1980s, before Tirole published his frst work, research into regulation was relatively sparse, mostly dealing with how the government can intervene and control pricing in the two extremes of monopoly and perfect competition.
    [Show full text]
  • The Firm As a Pool of Factor Complementarities
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lindbeck, Assar; Snower, Dennis J. Working Paper The firm as a pool of factor complementarities CESifo Working Paper, No. 1046 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Lindbeck, Assar; Snower, Dennis J. (2003) : The firm as a pool of factor complementarities, CESifo Working Paper, No. 1046, Center for Economic Studies and ifo Institute (CESifo), Munich This Version is available at: http://hdl.handle.net/10419/3085 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu THE FIRM AS A POOL OF FACTOR COMPLEMENTARITIES ASSAR LINDBECK DENNIS J. SNOWER CESIFO WORKING PAPER NO.
    [Show full text]
  • MARIASSUNTA GIANNETTI Stockholm School of Economics
    September 20, 2015 MARIASSUNTA GIANNETTI Stockholm School of Economics, Box 6501, Sveavagen 65, S-11383 Stockholm, Sweden Phone: +46-8-736 9607 Email: [email protected] Research Page: https://sites.google.com/site/mariassuntagiannetti/Home EDUCATION University of California, Los Angeles, Ph.D. in Economics, 1999 Bocconi University, Italy, Master in Economics, 1995 Degree awarded with distinction Bocconi University, Italy, Laurea in Economics and Social Sciences, 1994 Degree awarded with 110/110 Summa cum laude and recommendation of publication of the thesis (dignitá di stampa) AREAS OF INTEREST Corporate Finance and Governance, Financial Intermediation, Entrepreneurial Finance, International Finance, Development Economics CURRENT APPOINTMENTS Stockholm School of Economics, Professor of Finance, since December 2008 Center for Economic Policy Research, London, UK, Financial Economics Program, Research Fellow, since January 2009 European Corporate Governance Institute, Brussels, Belgium, Research Associate, since July 2004 European Finance Association (EFA), Director (elected), 2015-2017 EDITORIAL BOARDS Associate Editor, Review of Financial Studies, 2012-2015 Associate Editor, Review of Finance, since 2014 Associate Editor, Financial Management, since 2011 Associate Editor, Journal of Banking and Finance, since 2015 Associate Editor, Journal of Financial Services Research, since 2007 Associate Editor, European Financial Management, since 2015 Associate Editor, Review of Development Finance, since 2010 GRANTS, HONORS AND AWARDS
    [Show full text]
  • Programme Booklet
    Programme 6th Lindau Meeting on Economic Sciences 23 – 26 August 2017 MEETING APP TABLE OF CONTENTS WANT TO STAY UP TO DATE? Download the Lindau Nobel Laureate Meetings App. Available in Android and iTunes app stores. (“Lindau Nobel Laureate Meetings”) Scientific Programme page 8 About the Meetings page 34 • Up-to-date programme info & details • Session abstracts Supporters page 38 • Ask questions during panel discussions • Participate in polls and surveys Maps page 46 • Interactive maps • Connect to other participants Good to Know page 54 • Social media integration Download the app (Lindau Nobel Laureate Meetings) in Android, iTunes or Windows Phone app stores. Within the app, use the passphrase “marketpower” to download the guide for the 6th Lindau Meeting on Economic Sciences. 2 3 WELCOME WELCOME The 6th Lindau Meeting on Economic Sciences takes place during a climate With every meeting, we aim to further increase the opportunities of dia- of intense debate in society and science. Radical ideologies and re-emerging logue between laureates and young economists. This year, we are expand- separatist or nationalist sentiments add to a growing sense of insecurity ing formats of exchange into afternoon seminars: Selected economists will and isolation. Recent political decisions and their consequences are signs of have the opportunity to present their work to a group of laureates. Com- a global volatility. Further uncertainty is created by the trend of post-factual munication during the week will be improved by a meeting app that allows statements and science denial in public discourse. James J. Heckman gives up-to-date programme information. a possible response to this dilemma in a video on the future of economics: The Lindau Science Trail, a public exhibition project integrating science into “Empirical economics that’s grounded in solid data is a vaccine against this the Lindau city space, is a new addition to our outreach efforts as part of our post-truth world.” “Mission Education”.
    [Show full text]
  • The Role of the State in Economic Development
    THE ROLE OF THE STATE IN ECONOMIC DEVELOPMENT GUIDO TABELLINI CESIFO WORKING PAPER NO. 1256 CATEGORY 5: FISCAL POLICY, MACROECONOMICS AND GROWTH AUGUST 2004 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the CESifo website: www.CESifo.de CESifo Working Paper No. 1256 THE ROLE OF THE STATE IN ECONOMIC DEVELOPMENT Abstract This paper discusses the recent literature on the role of the state in economic development. It concludes that government incentives to enact sound policies are key to economic success. It also discusses the evidence on what happens after episodes of economic and political liberalizations, asking whether political liberalizations strengthen government incentives to enact sound economic policies. The answer is mixed. Most episodes of economic liberalizations are indeed preceded by political liberalizations. But the countries that have done better are those that have managed to open up the economy first, and only later have liberalized their political system. JEL Code: O1, O11. Keywords: political liberalization, democracy, economic development. Guido Tabellini IGIER Bocconi University 5, Via Salasco 20136 Milan Italy [email protected] I am grateful to Francesco Giavazzi for several helpful discussions, to Andrew Feltenstein and participants in the IMF conference on the Middle East and Northern Africa (MENA) region on April 7,8, 2004, Washington DC, for helpful comments, to Torsten Persson for sharing with me his data set on democractic institutions and economic development (Persson (2004)), to Gaia Narciso for excellent research assistance, and to Bocconi University and the Canadian Institute for Advanced Research for financial support.
    [Show full text]
  • Escaping the Climate Trap? Values, Technologies, and Politics∗
    Escaping the Climate Trap? Values, Technologies, and Politics Tim Besleyyand Torsten Perssonz November 2020 Abstract It is widely acknowledged that reducing the emissions of green- house gases is almost impossible without radical changes in consump- tion and production patterns. This paper examines the interdependent roles of changing environmental values, changing technologies, and the politics of environmental policy, in creating sustainable societal change. Complementarities that emerge naturally in our framework may generate a “climate trap,”where society does not transit towards lifestyles and technologies that are more friendly to the environment. We discuss a variety of forces that make the climate trap more or less avoidable, including lobbying by firms, private politics, motivated scientists, and (endogenous) subsidies to green innovation. We are grateful for perceptive comments by Philippe Aghion, David Baron, Xavier Jaravel, Bård Harstad, Elhanan Helpman, Gilat Levy, Linus Mattauch, and Jean Tirole, as well as participants in a Tsinghua University seminar, and LSE and Hong Kong University webinars. We also thank Azhar Hussain for research assistance. Financial support from the ERC and the Swedish Research Council is gratefully acknowledged. yLSE, [email protected]. zIIES, Stockholm University, [email protected] 1 1 Introduction What will it take to bring about the fourth industrial revolution that may be needed to save the planet? Such a revolution would require major structural changes in production as well as consumption patterns. Firms would have to invest on a large scale in technologies that generate lower greenhouse gas emissions, and households would have to consume goods that produce lower emissions. Already these observations suggest that the required transformation can be reinforced by a key complementarity, akin to the one associated with so- called platform technologies (Rochet and Tirole 2003).
    [Show full text]
  • The Political Economy of Prudential Regulation
    The Political Economy of Prudential Regulation Magdalena Rola-Janicka∗ Job Market Paper Link to the latest version November 22, 2019 Abstract This paper studies the equilibrium level of prudential regulation in a framework with negative borrowing externalities. A debt limit is implemented by a politician ap- pointed through majoritarian elections. As voting allows borrowers to internalize the externality, equilibrium regulation restores constrained efficiency whenever the politi- cian can commit to enforce it universally. Under selective enforcement, a captured regulator may exempt politically connected borrowers from regulation. Depending on the electoral power of the connected borrowers, the outcome may be an either too lax or too strict policy. The analysis deepens the understanding of the role of political economy factors in affecting equilibrium regulation. Additional results highlight the impact of income inequality on the strictness of the policy. Keywords: political economy; financial regulation; pecuniary externalities; fire sales JEL Classification: D62, D72, G28, H23, P16 ∗University of Amsterdam, [email protected], I am grateful to Toni Ahrnet, Suzanne Bijkerk, Harold L. Cole, Benoit Crutzen, Robin D¨ottling, Alessandro Dovis, Vincent Glode, Itay Goldstein, Piero Gottardi, Dennis Gromb, Albert Jan Hum- mel, Simas Kuˇcinskas, Guillermo Ordo~nez,Enrico Perotti, Ieva Sakalauskait_e,Tano Santos, Dana Sisak, Spyros Tertvitis and Bauke Visser for their valuable comments and suggestions. Seminar participants at the HEC Finance PhD Workshop, the University of Pennsylvania, the Workshop on Monetary and Financial Macroeconomics, the 7th International PhD Meeting, 9th Workshop on Banks and Financial Markets, Bordeaux Workshop in International Economics and Finance, the University of Amsterdam and the Tinbergen Institute also provided useful feedback.
    [Show full text]
  • Fairness and Redistribution
    Fairness and Redistribution By ALBERTO ALESINA AND GEORGE-MARIOS ANGELETOS* Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equi- libria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connec- tions, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies. (JEL D31, E62, H2, P16) Pre-tax inequality is higher in the United support the poor; an important dimension of States than in continental West European coun- redistribution is legislation, and in particular the tries (“Europe” hereafter). For example, the regulation of labor and product markets, which Gini coefficient in the pre-tax income distribu- are much more intrusive in Europe than in the tion in the United States is 38.5, while in Europe United States.1 it is 29.1. Nevertheless, redistributive policies The coexistence of high pre-tax inequality are more extensive in Europe, where the income and low redistribution is prima facia inconsis- tax structure is more progressive and the overall tent with both the Meltzer-Richard paradigm of size of government is about 50 percent larger redistribution and the Mirrlees paradigm of so- (that is, about 30 versus 45 percent of GDP).
    [Show full text]