Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution Policies
Allan Drazen and Nuno Limão ,
CEPR Discussion Paper No. 4007

We consider a bargaining model of the interaction between a government and interest groups in which, unlike existing models, neither side is assumed to have all the bargaining power. The government will then find it optimal to constrain itself in the use of transfer policies to improve its bargaining position. In a model of redistribution to lobbies, the government will find it optimal to cap the size of lump-sum transfers it makes below the unconstrained equilibrium level.

Links to Researchers