Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2003:2: Public Ownership and Income Redistribution

Michael Lundholm () and Hans Wijkander ()
Additional contact information
Michael Lundholm: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Hans Wijkander: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: The large differences among advanced OECD countries in the shares of workers that are employed by the government can probably only to a small part be explained by factors that are in the center of modern organization theory explanations for public vs. private ownership. This paper explores a new hypothesis for explaining the share of government employment. It is based on asymmetric information about individual worker productivity between the taxman, and workers and their employers. Hence, government employment opens up policy options, not available with only private production. The hypothesis is that government employment is an efficient element of redistribution policy. The mechanism is that the government can, through its employment policy, increase the relative scarcity in the private sector of the workers the government wants to redistribute in favor of. That increases their wages and lowers the need for redistribution through the tax- and transfer systems, which mitigates distortions. One can therefore expect large government employment in countries where the tolerance of inequality is low.

Keywords: Structure and Scope of Government; Optimal non-linear income taxation; public production; production efficiency

JEL-codes: H11; H21; H23

21 pages, September 11, 2002

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