Inefficient Redistribution

Abstract

There are many well-developed theories that explain why governments redistribute income, but very few can explain why this often is done in a socially inefficient form. In the theory we develop, compared to efficient methods, inefficient redistribution makes it more attractive to stay in or enter a group that receives subsidies. When political institutions cannot credibly commit to future policy, and when the political influence of a group depends on its size, inefficient redistribution is a tool to sustain political power. Our model may account for the choice of inefficient redistributive policies in agriculture, trade, and the labor market. It also implies that when factors of production are less specific to a sector, inefficient redistribution may be more prevalent.