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the form V (R, U ), where R is the rent appropriated by the politicians themselves
(which is modelled as pure waste), and
U is the welfare of the representative cit-
izen. Thus politicians trade off the interests of voters against rents to themselves.
Combining this objective function with a standard model of tax competition where
the marginal source of public funds is a source-based tax on mobile capital, Ed-
wards and Keen demonstrated that tax competition will have two offsetting effects
on consumer welfare. On the one hand it will tend to raise welfare by reducing
the volume of rents appropriated by politicians. On the other hand it will tend
to cause an underprovision of public goods by raising the marginal cost of public
funds. On balance, Edwards and Keen found that if the elasticity of the tax base
with respect to the tax rate is lower than the politicians’ marginal propensity to
spend public funds on ‘waste’, tax competition will be preferable to tax coordin-
ation, and vice versa.

Several other authors including Oates and Schwab (1988), Fuest (2000),
Rauscher (2000), Eggert (2001), Keen and Kotsogiannis (2003), Sato (2003),
Wilson and Gordon (2003) and Wilson (2005) have analysed the effects of tax
competition in Leviathan models where policy makers appropriate part of the
tax revenue for their own purposes. Janeba and Schjelderup (2002) have studied
how tax competition affects the ability of politicians to appropriate rents under
alternative political institutions, and Besley and Smart (2007) have investigated
the effects of various constraints on fiscal policy (including tax competition) when
imperfectly informed voters face the challenge of distinguishing Leviathan-type
politicians from benevolent political candidates. Whereas these contributions have
tended to find that tax competition may play an efficiency-enhancing role, Cai and
Treisman (2005) show in a Leviathan type model with asymmetric regions that tax
competition may actually generate more government ‘waste’ in poorly endowed
regions.

While all of these studies have generated valuable insights, the positive and
normative analysis of public policy in traditional Leviathan models has several
problematic features. First, the modelling of rents as pure waste goes against
the fundamental normative principle that the welfare of all citizens (including
rent-seekers) should be allowed to count in the social welfare function. Second, in
Leviathan models rent creation typically reduces political support for the policy
maker because rents are achieved at the expense of the welfare of voters. This
may be a reasonable way of modelling the kind of rent-seeking that takes the form



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