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Pp_levy_eng_logoBased on Levy (2004, 2005), Fernandez and Levy (2008), Bandiera and Levy (2008).
• People in society differ in their income, age, ethnicity, religion, geographical location… • What is the effect of diversity in society on • What is the effect of diversity on government provision of public goods such as infrastructure, education, health? • Diversity in income will result in pressures for income redistribution (or redistribution via general goods that everyone enjoys).
• Ethnic or religious diversity leads to pressure for provision of special goods such as faith schools, language programs. • How do income and preference heterogeneity • How does diversity in ethnicity or religion affect • If (poor) individuals do not agree on how to divide resources, how does this affect their ability to press for redistribution? • How does income inequality affect the ability of special interest groups to receive transfers and attract resources? • Conflicting preferences over resource allocation create cleavages among the poor and work against their general class interest. • Many narrow "special-interest groups" may drive the rich to ally themselves with the general interest of the poor if this lowers taxation. Society is composed of three groups.
Poor, Special Interest Poor, and Rich.
(ii) How to spend it: income redistribution to all, or funding of a specific good which only the special interest group enjoys.
• Poor: maximum taxation, income redistribution.
• Special interest poor: maximum taxation, revenue divided between income redistribution and provision of their good.
• The rich prefer them to the special interest poor – why waste money on goods they do not like. • The special interest poor prefer them to the rich: at least get some income redistribution.
• The poor also win when the special interest poor • Parties (western European parties), composed of different factions, enforce some internal compromise between different groups.
• If some groups unite together in a party they can offer policies which represent agreements or compromises among them. • Each party offers the best policy it can, given • No group wants to leave their party and run • The model can predict the stable configurations of parties (i.e., who goes with who), their policies, and who wins.
• The rich join the special interest poor and form a • They can find a compromise policy that both prefer compared with the policy advocated by the poor of maximum taxation and no special good.
• The tax rate is reduced, it is not at its maximum.
• Some of tax revenue finances the special good.
• If the tax level is low enough, better for both than a policy of maximum taxation and no special good provision.
• This explains why the poor do not expropriate • “Left”: big government and secular education vs. “Right”: small government and subsidized religious education for example.
• These issues combine because of economic • In many countries (US, India): coalitions of fiscally conservative with special interests (religious groups).
Smaller governments, less total redistribution.
Redistribution is tilted from the general interest to special interests.
Outcomes in diverse democracies are closer to the preferences of the elite and of the special interest groups.
• Indonesia is one of the world's most ethnically • By customary adat laws, some villages are controlled by the elites while in others decisions are taken democratically in community meetings. • We examine whether there is a difference between oligarchies and democracies in the provision of public goods like: - number of schools per capita, - number of health posts, - investment in roads, sewage… • And whether this difference decreases in the level of ethnic diversity in the village.
• Health and education: More health and education in democratic villages. For example, school fees are lower, teacher/pupil ratio is higher.
• Security: Less neighbourhood security in • Infrastructure: No difference: same access to electricity, piped water, sewage and waste collection services.
• Health and education: Much lower provision in heterogonous democratic villages than in homogenous ones: The number of health clinics per 1000 inhabitants is 12% higher in homogeneous democracies. • Security: Much higher provision of security in • Infrastructure: No effect of ethnic diversity.
The poor ethnic minority are more likely to get transfers in heterogeneous villages.
The elites can rule by forming a coalition with the poor ethnic minority, and The coalition chooses policies that give more weight to the preferences of the rich and ethnic minority at the expense of the poor majority.
Individuals do not like consumption by other groups. Individuals have different preferences, they are afraid others will make decisions on their behalf and thus prefer smaller governments. But then heterogeneous democratic villages would differ in the provision of all goods.
Individuals do not like interacting with others, want to limit consumption of goods which involve such interaction (such as in schools). But then we should not find that heterogeneity affects provision of health facilities.
The reason that diversity affects provision of goods could be a combination of economics and politics: (ii) The political process in which coalitions form gives an advantage to elites and special interest.
• How does ethnic or religious diversity affects the • The rich can collude with these special interests to reduce the size of government and target (some) transfers to them.
• World bank and other institutions call for decentralization and democratization.
• Do these indeed give actual voice to the poor? • Democracy matters in ethnically homogenous societies but does not have much effect in heterogeneous ones.
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