Public Finance, 2nd Edition

A Political Note

Assar Lindbeck et al. published a variation of the Besley±Coate model in

1999, in which their main contribution was to add a political dimension.

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Their model assumes that individuals have identical preferences but a con-

tinuum of skills (wages). There is no sharp distinction between the poor and

non-poor as in Besley±Coate. The stigma in their model depends on the

number of people who choose to accept transfers rather than work. The polity

is a direct democracy in which the transfer-tax policy is decided by a simple

majority of voters. Lindbeck et al. assume that everyone votes, so that the voter

with the median preferences is decisive.

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With identical preferences and a

continuum of skills, the person with the median skill level is the decisive voter.

Their model yields a number of interesting results, particularly regarding

the possibility of multiple equilibria. But we mention it primarily to highlight

the additional diYculties economists face as they try to bring political con-

siderations into their models. In the baseline model of Lindbeck et al., with

stigma but no altruism, the only possible equilibria under simple majority

voting are

1. Zero taxes and transfers if the majority of voters choose to work and

pay taxes

2. A tax-transfer equilibrium if the majority of voters choose not to work

Either outcome is far from the reality in any of the highly developed

market economies. Also, the poor do not vote in anywhere near the same

proportion as the non-poor in the United States, so that a direct democracy

with full voting would not seem to be the appropriate political model for

determining transfer payments in the United States. Unfortunately, no other

obvious alternative comes to mind. Lindbeck et al. do obtain more realistic

possibilities with extensions of their baseline model. But the point remains

that the assumed political environment can have a dramatic impact on the

implications of any economic model, which makes the uncertainties sur-

rounding the appropriate political model all the more troublesome for nor-

mative public sector theory.

REFERENCES

Bearse, P., Glomm, G., and Janeba, E., ``Why Poor Countries Rely Mostly on Redistribution In-

Kind,'' Journal of Public Economics, March 2000.

Besley, T., and Coate, S., ``The Design of Income Maintenance Programs,'' Review of Economic

Studies, April 1995.

Besley, T., and Coate, S., ``Understanding Welfare Stigma: Taxpayer Resentment and Statistical

Discrimination,'' Journal of Public Economics, July 1992.

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A. Lindbeck, S. Nyberg, and J. Weibull, ``Social Norms and Economic Incentives in the

Welfare State,'' Quarterly Journal of Economics, February 1999.

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Chapter 31 has a discussion of the median voter political model.

656 REFERENCES

Besley, T., and Coate, S., ``Workfare Versus Welfare: Incentive Arguments for Work Require-

ments in Poverty Alleviation Programs,'' American Economic Review, March 1992.

Blackorby, C., and Donaldson, D., ``Cash Versus Kind, Self-Selection, and EYcient Transfers,''

American Economic Review, September 1988.

Browning, E., ``EVects of the EITC on Income and Welfare,'' National Tax Journal, March 1995.

Browning, E., and Browning, J., Public Finance and the Price System, second ed., Macmillan,

New York, 1983.

Bruce, N., and Waldman, N., ``Transfers in Kind: Why They Can Be EYcient and Nonpaterna-

listic,'' American Economic Review, December 1991.

Buchanan, J., ``The Samaritan's Dilemma,'' in E. Phelps, Ed., Altruism, Morality and Economic

Theory, Russell Sage Foundation, New York, 1975.

Lindbeck, A., Nyberg, S., and Weibull, J., ``Social Norms and Economic Incentives in the

Welfare State,'' Quarterly Journal of Economics, February 1999.

MoYtt, R., ``An Economic Model of Welfare Stigma,'' American Economic Review, 1983.

Rowe, N., and Wooley, F., ``The EYciency Case for Universality,'' Canadian Journal of Eco-

nomics, May 1999.

Schloz, J., ``The EITC: Participation, Compliance, and Anti-Poverty EVectiveness,'' National

Tax Journal, March 1994.

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