Social Optimum and Political Equilibrium in the Economy with Two Types of Redistribution Politics

Abstract

We study the relationship between political equilibrium and social optimum in a simple political economy model with two forms of redistribution: lump-sum transfer and investment subsidy. Agents are endowed with different probabilities of success for risky investment projects and chose the level as well as the type of redistribution in the political equilibrium. Lump-sum transfer are beneficial for all agents while only a group of enterprising agents is provided with investment subsidies. We derive necessary conditions for efficiency of political equilib rium.