Essays on the Political Economy of Redistributive and Allocation Policies in Competitive Democracies

This dissertation investigates the political incentives for redistribution of income and allocation policies in competitive democracies. In Chapter 2, I examine incentives for political redistribution through in-kind transfers. By analyzing the political game between office-motivated politicians and self-interested citizens, I first show that in economies with competitive markets in-kind transfers are not required. Politicians can win elections targeting groups of voters with differential cash transfers. However, in-kind transfers arise in the presence of externalities in consumption. In that case, targeting groups of voters with in-kind rather than cash transfers allows politicians to attract simultaneously voters in additional groups with the same amount of resources. Politicians undertake political redistribution depending on the expected electoral returns obtained from targeting both cash and in-kind transfers into different groups. Furthermore, electoral competition leads the economy to achieve Pareto efficient allocations that markets cannot reach. Politicians internalize the presence of external effects when competing for marginal voters who could swing their vote. In Chapter 3, this dissertation investigates the politicians' incentives to pursue income redistribution when governments are constrained to levy taxes on labor income and this creates distortions. Politicians who strive to be elected may strategically redistribute through in-kind rather than cash transfers and overprovide consumption of goods. I show that the overprovision of in-kind transfers reduces the disincentive effects of taxation in labor effort and enlarges the pool of resources for political redistribution. As a result, politicians are able to implement larger redistributive transfers and improve the well-being of swing voters. Hence, electoral competition for pivotal voters provides politicians incentives to implement redistributive schedules that reduce distortions in labor markets and improve the efficiency of the taxation system. In Chapter 4, I investigate the effect of ideological preferences over the public provision of goods on the scope of government and the political redistribution of income. I first point out that the presence of both ideological politicians who compete for office and electoral uncertainty generates a partisanship effect. In particular, I show that pro-market (right-wing) politicians commit to lower public provision of goods and taxation schedules that implement larger income inequality than pro-government (left-wing) politicians. Furthermore, I find out that the public funding of goods through income taxation confers an electoral advantage to pro-market ideological positions. In fact, pro-market politicians can court moderate pro-leftist voters by promises of higher income which pro-government politicians are not willing to fund completely. As a result, right-wing party exhibits larger chances of winning elections and its proposal supports lower ideological sacrifice than the left-wing party.