closed economy which we may model by setting the number of countries n =1.
Suppose for a moment that there is no political distortion, i.e. δ =0. According
to (3.1) the political equilibrium under autarky then implies u0g = u0p which in turn
implies W = w and ug = up.Forn =1and δ = 0 equation (3.2) then reduces
to the Samuelson condition g0/u0 = FL . In other words, a political equilibrium
without capital mobility will guarantee a first-best allocation without rents when
there is no political distortion. In this case politicians cannot capture more votes
by offering particular benefits to one group at the expense of another, so vote-
maximising politicians have an incentive to act like a utilitarian social planner
who attaches an equal weight to the welfare of each individual citizen.
What happens if we allow political distortions in favour of public sector workers
while maintaining the autarky assumption? In that case we obtain
Proposition 1: Starting from an undistorted political equilibrium under autarky,
the introduction of a small political distortion in favour of public sector workers
will drive the public sector wage rate above the wage rate in the private sector. It
will also drive up the tax rate but will leave public sector employment unaffected.
Proof: See Appendix 3.
According to Proposition 1 the formation of a lobby for (some of the) public
sector workers will induce politicians to create rents to civil servants. Not sur-
prisingly, the tax rate will have to rise to finance the increase in public sector
wages. However, the number of public sector jobs will stay the same because of
two offsetting political incentives. On the one hand, the emergence of rents to
public sector employees provides an incentive for a political candidate to boost
public sector employment, since he can thereby capture more votes from outsiders
by increasing their chances of getting an attractive public sector job (see footnote
12). On the other hand, the emergence of the lobby makes public goods more
expensive by driving up the public sector wage rate. Ceteris paribus, this rise in
the cost of public goods provision induces politicians to offer fewer public sector
jobs. When there is no lobby initially, it turns out that these two countervailing
political incentives exactly neutralize each other.
Since part of the tax increase needed to finance the rise in public sector wage
rates is paid by private sector workers, the disposable income and private consump-
tion of public sector workers must go up. With an unchanged value of α = G,it
18