READ MY LIPS: THE POLITICAL ECONOMY OF INFORMATION TRANSMISSION. Timothy Besley and Rohini Pande London School of Economics and Political Science

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1 READ MY LIPS: THE POLITICAL ECONOMY OF INFORMATION TRANSMISSION by Timothy Besley and Rohini Pande London School of Economics and Political Science Contents: Abstract 1. Introduction 2. The Model 3. Full Information 4. Incomplete Information 5. Political Economy and Welfare Analysis 6. Discussion 7. Concluding Comments References 8. Proofs Theoretical Economics Workshop The Suntory Centre Suntory and Toyota International Centres for Economics and Related Disciplines London School of Economics and Political Science Discussion Paper Houghton Street No.TE/98/355 London WC2A 2AE July 1998 Tel.: I -

2 Abstract The paper studies credible information transmission by governments. A group of heterogenous individuals have to make private investment and labour supply decisions while relying on the government for information about investment returns. The government consists of an elected citizen who chooses a redistributive strategy in addition to providing information. We give conditions under which the outcome leads to overor under-investment in high return activities and the outcome is Pareto efficient. Keywords: Political economy; cheap talk; redistribution; development. JEL Nos.: H10, D82, H23, O12. by Timothy Besley and Rohini Pande. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source. - ii -

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