Expropriation and polarization: the role of mandatory spending in a political economy

• Grant number: 20/08465-6
• Support Opportunities: Scholarships in Brazil - Post-Doctoral
• Start date: November 01, 2020
• End date: August 01, 2021
• Field of knowledge: Applied Social Sciences - Economics
• Principal Investigator: Bernardo de Vasconcellos Guimaraes
• Grantee: Laura Karpuska
• Host Institution: Escola de Economia de São Paulo (EESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil

Abstract

This project aims to study the welfare implications of a class of budget rules, the ones that determine mandatory spending. I analyze a model with two parties that allocate a fixed budget to private transfers and a public good. Each period a party is chosen to propose an allocation while the other party can accept or reject the proposal. Mandatory spending is modeled in the spirit of dynamic legislative bargaining with an endogenous status quo. The relative taste for public goods defines the level of political disagreement in society. Three questions are raised. First, does the type of good under mandatory spending matters? Second, does the level of political polarization matters to answer the first question, in the sense that welfare impacts of mandatory spending will depend on how polarized a society is? Finally, how does political turnover impacts welfare gains from mandatory spending? Although the common wisdom hints that more political turnover is better, most political economy models in the literature deliver the opposite result. Will that remain true when there are institutions, such as mandatory spending that prevent expropriation?