A theoretical study of political institutions and economic policies

Citation

Chen, Yan (1995) A theoretical study of political institutions and economic policies. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/mzzc-zc64. https://resolver.caltech.edu/CaltechETD:etd-09122007-103429

Abstract

This dissertation consists of two relatively independent chapters that study the effects of political institutions on economic policies.

Chapter I studies the privatization policies of maximizing politicians in a tightly managed transition economy under different political institutions. The majority of literature pertaining to privatization policies ignores the political constraints and the motivation of the politicians. In this dissertation, we consider two types of politicians, a Niskanen-style Bureaucrat who maximizes a surplus budget subject to the constraint of staying in office, and a Populist who maximizes consumer welfare subject to the constraint of a balanced budget. Other things being equal, the Bureaucrat will privatize the sector (firms) with the least market power and the largest subsidy first. The Populist will adopt the same policy, if the marginal costs of products in the private sectors are not too high with respect to the marginal utilities. We also show that controlled privatization is easier and faster in less democratic societies.

Chapter 2 examines the effects that political processes, i.e., electoral systems and legislative processes, have on income taxation and public good allocation. We characterize the equilibrium income tax schedules under two types of political institutions. It is shown that, when there is a single district, for the two party plurality system the equilibrium income tax schedule is equivalent to an optimal tax schedule that puts equal weight over the whole population; when there are multiple districts, however, the simplest subgame perfect stationary equilibrium tax schedule of the stochastic legislative game is equivalent to an optimal tax schedule that puts more welfare weight on the subsets of the population whose legislators are in the winning coalition of the legislature. Thus, the social welfare functions in the optimal taxation literature can be endogenously determined by explicitly modelling the political processes that determines them.

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