Insuring Legislative Wealth Transfers: Theory and Evidence
The interest group theory of government assumes the state’s primary purpose is to facilitate wealth transfers among various interest groups. The value of these transfers depends on their durability, which can be increased by mechanisms that increase the cost of repealing the transfer. Nonetheless, these mechanisms cannot be expected to function perfectly, and thus uncertainty surrounding the durability of these transfers remains. We argue that this uncertainty could be mitigated by an insurance mechanism that compensates interest groups if the other durability enhancing mechanisms fail. We use the 2014 settlements between the Department of Justice and Bank of America and Citigroup to illustrate how such an insurance mechanism works, both of which were required to make mandatory donations to housing counseling organizations whose funding Congress reduced three years prior.
Recommended citation: Cutsinger, B.P., Marsella, A. & Zhou, Y. Insuring legislative wealth transfers: theory and evidence. Public Choice 192, 127–144 (2022). https://doi.org/10.1007/s11127-022-00975-5