This thesis examines the public policy choice and its impact under two political systems, democracies and authoritarian regimes. Chapter 2 explores the relationship between inequality and taxation in a political economy model where agents with different wealth choose to be workers or entrepreneurs. It has been shown in studies of political economy of taxation that inequality and taxation are positively related while the results of empirical studies are mixed. By introducing occupational choice, we show that more inequality may lead to two possible results. In this framework, agents vote for their preferred tax rate based on their own income (wage income, investment profits and received transfers) and the occupational choice of others. Tax policy affects the economy through two effects. A higher tax rate discourages entrepreneurial investment and thus affects the tax revenue collected. In addition to this direct effect, it indirectly affects the income of agents by reducing the equilibrium wage as having fewer entrepreneurs reduces labor demand. We show that the demand for redistribution is a function of the wealth distribution depending on how it affects agent's wage and the transfers received. How the tax rate changes given more inequality depends on which effect dominates. Chapter 3 develops a political economy model to examine the principal-agent problem in fiscal federalism in the context of China. We formalize the fiscal policy choice of local government focusing on the mechanism of political selection and its implications on growth and welfare under Chinese authoritarian regime. It shows how the perceived political promotion system induces local officials to maximize growth through allocation of public spending. Our model well explains the facts of extraordinary growth in China in the past decades in spite of its weak institutions, and the mechanism of less resources invested for poverty alleviation, equality and pollution reduction. Another incentive is suggested to solve the principal-agent problem in intergovernmental relationship in China.
|Date of Award
|1 Aug 2018
- The University of Manchester
|Katsushi Imai (Supervisor), Xiaobing Wang (Supervisor) & Wenya Cheng (Supervisor)