Economic Policy Divergence when Political Conflict Arises between Groups

Purpose - This paper aims to explore how political conflict between groups influences economic policy decision-making, focusing on scenarios where two groups with opposing interests contend for political power. Design/Methodology/Approach - The analytical framework of this study is heavily influenced by Persson and Tabellini (2000)’s probabilistic voting model for public finance and public good provision. Findings - When firms produce substitute goods and the redistribution rate is high, political conflict arises between voters and conglomerates, as well as between conglomerates and small firms. In contrast, when firms produce complementary goods and the redistribution rate is high, no political conflict emerges among these groups. When firms produce complementary goods and the redistribution rate is low, political conflict arises between voters and firms. Finally, the tax rate does not converge to a single level due to the divergent political philosophies of each party regarding redistribution. Research Implications - Contrary to the typical convergence of party policies in the probabilistic voting model, this study demonstrates that parties may diverge in their policy stances when they hold conflicting views on redistribution. Furthermore, the results suggest that a party’s commitment to voter welfare is directly correlated with its inclination to impose higher taxes on large corporations.