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Policy restrictions, democratic deficit and redistribution

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Restrictions to the range of policies available to governments are often recommended as a solution to coordination failures or time inconsistency problems. However, policy restrictions can have important drawbacks that have been generally ignored so far. When the hands of governments are tied, citizens have lower incentives to be informed on political matters and to participate in collective decision-making processes, since private returns from political information are lower. This mechanism provides a micro-foundation for the idea that the so-called "democratic deficit" induces low participation in political life. Moreover, a fiscal policy restriction tends to reduce redistribution by inducing lower political information acquisition by part of poorer voters. We show that an exogenous restriction on the amount of public good that a government can supply (or on the taxes that can charge) may induce less public good supply (less taxation) with respect to its no-restriction level, independently of whether the restriction imposes a maximum amount, a minimum, or both. Perversely, the equilibrium outcome can be very different from what the restriction intended to achieve.

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