Distribution, Politics and Efficiency: A Common Agency Approach∗

This paper investigates the impact of wealth distribution on economic efficiency when redistribution is done via the composition of public ex-penditure, and is influenced by the interaction of pressure groups. This is modeled in a common agency framework, and it is first shown that, in the presence of a productive activity, truthful equilibria of common agency games might be inefficient if there is no perfect commitment or perfect credit markets. This result is then used to show that wealth distribution can have a larger effect on efficiency than what is due to the capital market imperfections themselves, in that it sets in motion the conflict between pressure groups that leads to a distorted allocation of government expen-ditures (even under perfect information): the resulting allocation fails to reach the constrained optimum. Moreover, the inefficiency is not due to any intrinsic distortionary effect of redistribution, being linked to the na-ture of the political process. Finally, changes in distribution can have two additional effects in the outcome of this process, other than by changing the relative proportion of agents favoring redistribution: it changes the efficient allocation itself, for the policy variable has a direct productive effect, and impacts each groups ’ ability to coordinate as such. The overall effect might be ambiguous.