Coate Morris (1995) - On The Form Of Transfers To Special Interests
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Coate, S. and S. Morris (1995), On the Form of Transfers to Special Interests, Journal of Political Economy 103(6), 1210-35. pdf
An important question in political economy concerns the form of transfers to special interests. The Chicago view is that political competition leads politicians to make such transfers efficiently. The Virginia position is that lack of information on the part of voters leads politicians to favor inefficient "sneaky" methods of redistribution. This paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests. It shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians, inefficient methods of redistribution may be employed.
Summary and Model
Fully rational citizens are uncertain about (a) How necessary a policy is, and (b) whether a politician is "good" for public welfare or "bad" (ie, help special interests only).
Good politicians want only what is best for society. Bad politicians want to transfer to special interests. They can do so by either funding unnecessary projects or through direct transfers. Choice of project and transfer is observable.
Main result: Politicians may prefere inefficient transfers to special interests because they conceal the politician's type.