Information distortion and competitive remedies in government transfer programs: The case of ethanol

This paper reconsiders the analogy between competitive markets and the political process that is central to much of the literature on the efficiency of government transfers. The key problem is that property rights in politics are much less well defined than they are in competitive markets. As the paper outlines, obtaining accurate information about the benefits and costs of transfers is likely to be much more difficult than envisioned in the literature. Investigators, as well as general voters, often must rely on the government and competing parties for provision of information about underlying program parameters and functional relationships. We argue that politicians and the affected interest groups have incentives to limit and distort the information that is released to voters and that political competition is unlikely to be an effective counter. In developing the argument, a theoretical framework is provided and applied in a case study of the ethanol transfer. The documented efforts to disguise the actual costs and benefits of the program are important for gaining a broader understanding of the functioning and costs of government transfers in the economy.