Income Redistribution and Public Good Provision in a Diverse Society Selim Jürgen Ergun Universidad de Granada 13/12/2008

Aim To analyze the post-electoral coalition formation process in a two dimensional political environment and to find which stable coalitions might form and the set of policies they would implement 13/12/2008

Introduction Preference heterogeneity → Formation of parties → Multidimensional political competition → Government (coalition) formation In this paper Two dimensional political environment: degree of income taxation and the provision of a group specific public good 13/12/2008

Introduction A society consisting of three different groups Three parties, each one representing a specific group, with objectives: Mainly office motivated, and only instrumentally caring about policy (Aragonès 2007) Both office and policy motivated 13/12/2008

Timing of the Game Each party makes a policy announcement Voters cast their vote Votes are transformed into seats where “ideal proportionality” applies Coalition government is formed, office spoils are shared and policy is implemented 13/12/2008

Voters A finite number of citizens, N, consisting of three groups R, P, E with size of nR, nP, nE respectively The utilities of these three groups: yR, yP: incomes, t: tax rate, T: transfer, g: level of public good k measures the degree of diversity (k>0) v(g) linear or concave 13/12/2008

Parties Three parties, R, P, E, each representing the corresponding group Parties care only instrumentally about policy: C: coalition government 13/12/2008

Budget Constraint/Indifference Curves The budget constraint of the government: (y is average income) Indifference Curves 13/12/2008

Indifference Curves g=Ny g=Ny g=Ny t=0 t=1 t=0 t=1 t=0 t=1 Indifference Curves of R Indifference Curves of P Indifference Curves of E (v(g) concave) 13/12/2008

Pareto Sets g=Ny g=Ny t=0 t=1 t=0 t=1 v(g) concave v(g) linear Pareto Set PE Pareto Set PE Pareto Set RE Pareto Set RE t=0 t=1 t=0 t=1 Pareto Set PR Pareto Set PR v(g) concave v(g) linear 13/12/2008

Main Results A stable coalition exists if the value of holding office is sufficiently large. A stable coalition is more likely if: The degree of diversity is lower The level of income of the rich group is lower The distribution of seat shares is more unequal 13/12/2008

Other Results The set of policies that can be implemented by a stable coalition is larger The lower the level of income of the rich The lower the degree of diversity whenever the ethnic minority forms part of the government 13/12/2008

Policy and Office Motivated Parties As before, for stable coalitions to exist the benefits of office should be large enough Now, the critical value of B might be smaller Intuition: The party outside the government would be willing to “give less” to the parties in the government 13/12/2008

Solely Office Motivated Parties If parties were only policy motivated, no stable coalition would exist 13/12/2008

Conclusions For stable coalitions to exist, the benefits of office should be large enough. This critical value depends on the degree of diversity and the income levels 13/12/2008

Conclusions This result can help to explain the following observations: In some countries the coalition formation process takes a short time in others not The duration of coalition governments varies from country to country Short process and higher probability of stability if incomes are more equal and degree of diversity is lower Bandiera and Levy (2007) 13/12/2008

Further Research Disutility from forming a coalition Strategic voters 13/12/2008