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Distributive Politics and the Poor [Work in Progress]

Distributive Politics and the Poor [Work in Progress]. Christian Ponce de León A. The University of Chicago Summer Institute on the Empirical Implications of Theoretical Models 2006 University of Michigan Ann Arbor, Michigan July 13, 2006.

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Distributive Politics and the Poor [Work in Progress]

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  1. Distributive Politicsand the Poor[Work in Progress] Christian Ponce de León A. The University of Chicago Summer Institute on the Empirical Implications of Theoretical Models 2006 University of Michigan Ann Arbor, Michigan July 13, 2006

  2. Then, again, do not tell me, as a good man did to-day, of myobligation to put all poor men in good situations. .Are they my poor? I tell thee, thou foolish philanthropist,that I grudge the dollar, the dime, the cent, I give to suchmen as do not belong to me and to whom I do not belong. .Ralph Waldo Emerson, Self-Reliance Question • Are democratic regimes in developing countries politically capable to carry out poverty alleviation programs?

  3. Null Hypothesis • Democratic regimes in developing countries will redistribute more resources to the poor because high levels of income inequality locate the median voter far to the “left” of the average income voter. Alternative Hypothesis • Due to economic constraints and income inequality, the group of relatively wealthy voters (and not the median voter) will decide how to allocate resources to alleviate poverty.

  4. Plan of the Presentation • The model (incomplete) • Feedback on Empirical Implications and on Modeling

  5. Definitions • Poverty Alleviation Program: Can be classified as entailing short and long term policies. Short-term policies are those that attend to immediate needs, such as primary health care and the provision of food through direct transfers. Long-term programs provide to the poor the means to integrate themselves into the labor market in the formal economy. They include access to education, housing, public infrastructure (especially in the case of rural areas), potable water and sewerage, and electricity.

  6. The model • Policy preferences • Two policies, universal social programs q1 and targeted poverty alleviation programs q2 • Public finance • Taxes collected at a common rate t • Post-electoral politics • Three representatives, one for each income group: the wealthy, the median class, and the poor

  7. The model Let: • Society with large number of citizens • Each individual is of type ‘i’ with income yi (only source of heterogeneity) which is distributed according to: F(yi;× ) • Individuals whose income is below the exogenous poverty line yp are eligible to receive assistance

  8. The model (policy preferences) wi = ci + H(q1) + J(q2/HC) where: wi – quasi-linear preferences of individual (non-poor) type i ci – private consumption of individual type i q1 – government expenditure percapita on universal social programs (Q1/N) q2 – government expenditure percapita on targeted poverty alleviation programs (Q2/N) HC – Headcount; HC=F(yi=yp;× ) H(×) and J(×) – are concave increasing functions where H(a) > J(a)" aÎÂ+ and H(0) = J(0) = 0

  9. The model (public finance) wi = ci + H(q1) + J(q2/HC) • q1+q2 is financed only by taxing each citizen’s income yiat a common rate t where 0£t£1, thus: ci = (1-t)yi • Let y=Y/N, then the budget constraint can be defined as: ty= q1+q2

  10. The model (public finance & policy preferences) wi = ci + H(q1) + J(q2/HC) • Substituting and rearranging terms: Wi=(y-q1-q2)*(yi/y)+H(q1)+J(q2/HC) • FOC: q1= Hq1-1(yi/y);q2= Jq2-1[(yi/y)*HC]*HC

  11. The model (policy preferences) Wi=(y-q1-q2)*(yi/y)+H(q1)+J(q2/HC) Intermediate preferences (Grandmont, 1978) Def. Voters have intermediate preferences if their indirect utility function W(q;ai) can be written as: W(q;ai)=J(q)+K(ai)H(q;×) Prop. If voters have intermediate preferences, a Condorcet winner exists and is given by: q(am)

  12. The model (policy preferences) • Direct utility function of the poor: wp = cp + H(q1)where:cp = (1-t)yp + (q2/HC) • Indirect utility function is: Wp = (y – q1 – q2)*(yi/y) + (q2/HC) + H(q1) • FOC: q1=Hq1-1(yi/y); q2=ty - Hq1-1(yi/y)

  13. The model (economic constraints) • Let t < 1 be a positive and exogenous level of taxation that represents a limitation on how much the economy can be taxed. • Then the new budget constraint can be defined as: t y= q1+q2

  14. The model (post-electoral politics) • Three representatives, one for the wealthy, one for median class, and one for the poor where: yw> ym> yp • Each representative maximizes its probability of staying in office • Probability of staying in office is decreasing on both, the loss function of their constituency and changes in the direction of policies • At a fixed period of time, the three representatives can make a proposal on how to redistribute resources between policies q1 and q2

  15. Feedback?

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