Government Information Transparency

Abstract

This paper studies a model of announcements by a privately informed government about the future state of economic activity in an economy subject to recurrent shocks and with distortions due to income taxation chosen by majority voting. Although transparent communication would ex-ante be desirable, we find that even a benevolent government may decide to be non-informative in an attempt to countervail the tax distortion in a second-best type of policy. In a politico-economic (Nash) equilibrium, transparency critically depends on inequality, which influences both tax and information distortions. Such influence in turn depends on labor supply elasticity. Our results provide a rationale for independent national statistical offices, committed to truthful communication.

Market Distortions and Government Transparency

“…For example, an elected government might be influenced by lobbying activity or by a demand for redistribution. In Albornoz, Esteban, and Vanin (), we have explored the latter possibility and have shown that inequality reduces transparency because it generates higher taxes. This finding modifies the results obtained in Section , where we have shown how the effects of inequality on transparency depend on labor supply elasticity.…”

“…This can be seen most clearly in Albornoz, Esteban, and Vanin (), where mixed strategies allow for a semiseparating equilibrium.…”

“…To the extent that inequality generates higher tax rates and thus greater distortions, it may also have an indirect effect on transparency. To explore this mechanism, in Albornoz, Esteban, and Vanin (), we have provided a political economy extension of the analysis where taxes are chosen by majority voting (along the lines of Meltzer and Richard ) . The impact of inequality then results from the combination of two effects.…”