SFB 303 Discussion Paper No. A-398

Author: Nitzan, Shmuel
Title: Transfers or Public Good Provision? A Political Allocation Perspective
Abstract: Politically contestable transfers may take the form of individual transfers, group transfers or public-good transfers. This paper analyzes the problem faced by an optimizing politician of how to allocate his budget among these three types of transfers. The first result establishes that the politician's equilibrium strategy entails selection of an extreme type of portfolio of transfers consisting of just one type of transfer. This result provides a possible explanation for the tendency of politicians to specialize in the "production of transfers". The second and main result specifies the condition determining the nature of the preferred kind of transfer in terms of the environmental parameters: the distribution of the potential individual beneficiaries of the transfers across groups, the rule used within groups to distribute private-good transfers, and the relative value of a dollar spent on the provision of the local public good. This result which sheds new light on the question of how governmental transfer patterns are determined might be useful in explaining transfer patterns variability in different economic environments.
Creation-Date: 1993
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