On the relationship beetween [sic] targeted redistribution and economic informality in democracies : a theoretical and empirical exploration

Is there a causal link between corrupt machine politics and informality? Historical and empirical evidence support a positive answer to this question. The first paper offers a theoretical perspective, which more generally asks how redistributive politics in a democracy affects the allocation of factors in a dual economy with a modern and a traditional sector. A model of electoral competition with endogenous group size and output shows that electoral political agency through targeted redistribution (sector-specific tax rates) can either promote or discourage the growth of the modern sector. However, the effect of changes in sector size on total output is ambiguous and depends on parameter combinations. These insights contrast with traditional models in redistributive politics in which group sizes are exogenous and allocation effects are overlooked. In this framework, economic forces at work that come from productivity differentials and endowment distribution are able to outweigh the effects of the ideological density. The second paper explores evidence from 64 democracies through an instrumental variable approach. The hypothesis is that machine politics shapes institutional quality in democracies and thereby determines informality. The conceptual framework is based on the political exchange space and the portfolio theory of electoral investment. Machine politics is proxied by electoral risk, and institutional quality is measured by the index of the rule of law. Instruments of machine politics are searched for among de-jure political institutions. This analysis confirms results already discussed in the related literature on government quality, determinants of informality and the effect of electoral rules on corruption, however, the main contribution of this research is to bring political structure into the picture, here the party system, insofar as it is a key intermediating mechanism between political institutions (de-facto and de-jure) and social outcomes (political and economic). In other studies the political structure is a black box that readily disappears when estimating reduced-form equations