Distributional Conflict in Small Open Economies

Andreas Schaefer, Thomas Steger

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Abstract

We aim at a better understanding of the inefficiencies resulting from distributional conflict in small open economies. To this end, a general equilibrium model with the following characteristics is set up: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The overall distributional-conflict inefficiency is decomposed into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) indicates that the distributional-conflict inefficiency may cause a substantial output loss.
Original languageEnglish
Pages (from-to)355
Number of pages367
JournalResearch in Economics
Volume67
Issue number4
DOIs
Publication statusPublished - Dec 2013

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Inefficiency
Distributional conflict
Small open economy
Conflict of interest
Outside options
Time inconsistency
Income tax
Government expenditure
Exercise
General equilibrium model
Strategic interaction
Workers
Political process

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Distributional Conflict in Small Open Economies. / Schaefer, Andreas; Steger, Thomas.

In: Research in Economics, Vol. 67, No. 4, 12.2013, p. 355.

Research output: Contribution to journalArticle

Schaefer, Andreas ; Steger, Thomas. / Distributional Conflict in Small Open Economies. In: Research in Economics. 2013 ; Vol. 67, No. 4. pp. 355.
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