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2018 | OriginalPaper | Buchkapitel

3. Politics and Corruption in the Two-Period Model

verfasst von : Maksym Ivanyna, Alex Mourmouras, Peter Rangazas

Erschienen in: The Macroeconomics of Corruption

Verlag: Springer International Publishing

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Abstract

In the attempt to better explain economic policies, this chapter introduces selfish motives on the part of policy makers. While they may have one eye on the national interest, as in Chap. 2, the other eye is fixed on individual gains such as being re-elected or increasing personal income. Our main purpose is to highlight the ways that politics and selfish motives distort fiscal policy and lower national welfare.

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Vorheriges Kapitel Two-Period Model of Government Investment

Nächstes Kapitel Overlapping-Generations Model of Economic Growth

Nur mit Berechtigung zugänglich

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.

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).

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)

A household from group j has after-tax income (1 − τ _i)y _i h _ij. The effect of an increase in h _ij is \( {y}_i\left[1-{\tau}_i-\frac{d{\tau}_i}{dh_{ij}}{h}_{ij}\right] \). Differentiating the budget constraint with respect to h _ij, gives \( \frac{d{\tau}_i}{dh_{ij}}=-\frac{\tau_i}{m}{h}_{ij} \). 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 h _i = h _ij under our symmetry assumption. The variable y _i does not appear in (18) because it appears on both sides and can be cancelled.

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.

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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Titel: Politics and Corruption in the Two-Period Model
verfasst von: Maksym Ivanyna
Alex Mourmouras
Peter Rangazas
Verlag: Springer International Publishing
Buch: The Macroeconomics of Corruption
Print ISBN: 978-3-319-68665-3

Electronic ISBN: 978-3-319-68666-0

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-68666-0_3