Political intervention in economic activity

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Serie documentos de trabajo. No 83 (Junio 2010)

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Gilles, Enrique
Facultad de Economía; Universidad del Rosario
338.9; Economía; Política económica; Clientelismo; Distribución de la riqueza; probabilistic voting; redistribution; survival of inefficient firms; pork barrels; probabilistic voting, redistribution, survival of inefficient firms, porkbarrels
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This paper proposes a political economy explanation of bailouts to declining industries. A model of probabilistic voting is developed, in which two candidates compete for the vote of two groups of the society through tactical redistribution. We allow politicians to have core support groups they understand better, this implies politicians are more or less effective to deliver favors to some groups. This setting is suited to reproduce pork barrels or machine politics and patronage. We use this model to illustrate the case of an economy with both an efficient industry and a declining one, in which workers elect their government. We present the conditions under which the political process ends up with the lagged-behind industry being allowed to survive.