Seminar

Economic Coercion in Public Finance

Beat Hintermann (University of Basel)

November 4, 2013, 11:00–12:30

Toulouse

Room MS 001

Environment Economics Seminar

Abstract

We develop a theory of social planning with a constraint on economic coercion, which we define as the difference between consumers’ actual utility, and the "counterfactual" utility they expect to obtain if they were able to set policy themselves. The social planner limits economic coercion, either to protect minorities or to prevent disenfranchised groups from engaging in socially costly behavior. We show that if consumers are not fully rational and/or informed, the introduction of a coercion constraint leads to additional terms that render counterfactual utility endogenous. The coercion-constrained policy optimum appears to be dominated by a set of policies that increase overall welfare as well as the utility of the most-coerced individuals, but carrying out such a policy change would in fact change the counterfactual and increase coercion beyond the permissible level. We obtain similar results in a probabilistic voting framework, but their interpretation differs: Whereas the social planner will use his superior knowledge about the effect of policy variables to increase long-term welfare subject to a coercion maximum, the political candidate will employ the same knowledge to win elections, possibly to the long-term disadvantage of voters. Economic coercion can also lead to a divergence between announced and realized policies. We illustrate our results numerically.