Inefficient redistribution and inefficient redistributive politics

This paper examines the effect of inefficient redistribution in Myerson’s (1993) model of redistributive politics. Regardless of the absolute levels of the efficiency of political parties’ transfers to different voter segments, parties have incentive to (stochastically) shift resources away from voter segments with large relative efficiency gaps between the two parties’ transfers towards voter segments with smaller relative efficiency gaps. Because of this dependence on relative, and not absolute, levels of efficiency, the parties’ optimal strategies may lead to large discrepancies between the sum of the budgetary transfers and the sum of the effective transfers. At the extreme, in the spirit of Magee, Brock, and Young (1989), we obtain „black hole” inefficiency. When the model is extended to allow for loyal voter segments and loyalty to a party is positively related to the efficiency of that party’s transfers to the segment, the incentives leading to black hole inefficiency become even stronger.