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2021 | OriginalPaper | Chapter

3. Politics and Corruption in the Two-Period Model

Authors : Maksym Ivanyna, Alex Mourmouras, Peter Rangazas

Published in: The Macroeconomics of Corruption

Publisher: Springer International Publishing

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Abstract

Chapter 2 tells us that benevolent national policy makers, motivated to maximize aggregate welfare, make efficient investments in public capital and favor poor regions in the allocation of that capital in order to increase economic growth and equalize regional income. In contrast to this optimistic view of government policy, the evidence from Chap. 1 indicates there are autocratic regimes that are far from benevolent. Many countries have failed to experience sustained modern growth and their living standards have diverged from, rather than converged to, those of rich countries. Empirical evidence indicates that income convergence across regions within a given country was characteristic of the twentieth century (Barro and Sala-i-Martin 1991, 1992). However, the rate of convergence was quite slow over the first 75 years of the century. Over the last 40 years, incomes have ceased to converge and may have actually diverged. (Arcalean et al. 2012; Ganong and Shoag 2013; Sacchi and Salotti 2011). The situation has been complicated by a slowdown in aggregate productivity growth that has reduced private and government resources that could be used to deal with persistent inequality.

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previous chapter Two-Period Model of Government Investment Government investments
next chapter Overlapping-Generations Model of Economic Growth
Appendix
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Footnotes
1
This result is in contrast to Peletier et al. (1999) who find that polarization does not alter the efficient investment choice. They assume that public investment does not increase private income, only the resources available to the government. The Appendix to this chapter explains the difference in results in more detail.
 
2
Despite the difference in the unconstrained case, the result that a borrowing constraint leads to inefficiently low public investment is consistent with Peletier et al. (1999).
 
3
Easterly (2001) argues that increased education will not lead to increased production when the incentives are not right. “One clue as to why education is worth little more than hula hoops to a society that wants to grow comes from what educated people are doing with their skills. In an economy with extensive government intervention, the activity with the highest returns to skills might be lobbying the government for favors. In an economy with many government interventions, skilled people opt for activities that redistribute income rather than activities that create growth” (p. 82).
 
4
A household from group j has after-tax income (1 − τi)yihij. The effect of an increase in hij is \( {y}_i\left[1-{\tau}_i-\frac{d{\tau}_i}{dh_{ij}}{h}_{ij}\right] \). Differentiating the budget constraint with respect to hij, gives \( \frac{d{\tau}_i}{dh_{ij}}{h}_{ij}=-\frac{\tau_i}{m} \). Substituting into the expression for the change in disposable income gives \( {y}_i\left[1-{\tau}_i+\frac{\tau_i}{m}\right] \), where we have used the fact that hi = hij under our symmetry assumption. The variable yi does not appear in (3.18) because it appears on both sides and can be cancelled.
 
5
Higher taxes would also hit the wages paid to those in unproductive government employment. However, interest groups would work to protect their after-tax wages by lobbying for higher before-tax wages, so that their net transfer from the government remains the same. Thus, taxes will primarily lower the reward to productive work.
 
6
In stressing the importance of cutting government consumption to repay loans, we do not deny that in many poor countries the allocation of government consumption is inefficient. Productive bureaucrats are paid too little and unproductive ones are paid too much. We feel the level of government consumption is a bigger problem in many countries and an easier problem to address. Although difficult to implement, the best policy would be to cut government consumption overall and reallocate spending to productive government employees.
 
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Metadata
Title
Politics and Corruption in the Two-Period Model
Authors
Maksym Ivanyna
Alex Mourmouras
Peter Rangazas
Copyright Year
2021
Book
The Macroeconomics of Corruption

Print ISBN: 978-3-030-67556-1

Electronic ISBN: 978-3-030-67557-8

Copyright Year: 2021

DOI
https://doi.org/10.1007/978-3-030-67557-8_3