the after-tax interest rate, exploiting the symmetry assumption that all countries
end up choosing the same policies in equilibrium:6
|
∂r |
__(1 - |
α) k0 |
1 |
(2.13) |
|
— = |
---- =-- | |||
|
∂τ |
(1 — α) k0 + (n |
- 1) (1 |
— αb) kb0 n | |
|
∂r |
k |
_ k |
(2.14) | |
|
∂α = |
(1 — α) k0 + (n — |
1)(1 - |
b) b0 n (1 - α) k0. |
When choosing their fiscal policy platforms, politicians account for these policy
effects on the interest rate.
To focus on the potential conflicts of interest between private and public sector
employees, we assume that capital endowments are equally distributed across the
working population. Recalling that the total labour force is normalised at unity,
this means that each worker owns the amount of capital k. Denoting the public
sector wage rate by W , the private consumption of the two types of workers is
then given by
Cg = W + rk, Cp = w + rk. (2.15)
2.4. The political economy of fiscal policy
The policy variables in our model are W, G and τ . We wish to provide a simple
framework in which these variables are chosen by politicians competing for votes.
Inspired by Persson and Tabellini (2000, ch. 3), we describe the political process
by a probabilistic voting model with lobbyism. In our particular version of this
model, voters are split into ‘insiders’ and ‘outsiders’. The insiders are all employed
in the public sector and all belong to a lobby (say, a trade union) which enforces
the wage rate W throughout the public sector in order to prevent underbidding
from outsiders. The outsiders are those voters who do not belong to the lobby.
These individuals are employed either in the public or in the private sector. Thus
the ‘marginal’ workers in the public sector are outsiders although they are paid
the same wage as the insiders. As we shall see below, in the absence of tax
competition the public sector wage rate will generally exceed the private sector
wage. The marginal high-paying public sector jobs that are not already filled by
the insiders are allocated to some of the outsiders. Flexible wage adjustment in
6 The symmetry assumption implies that α = αb and τ = τb in equilibrium so that
(1 - α) k0 (r + τ ) = (1 - αb ) kb0 (r + τb).
10