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On the Faustian Dynamics of Policy and Political Power

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  • Jinhui H. Bai
  • Roger Lagunoff

Abstract

This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following "Faustian trade-off": if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot uncouple the direct effect of his policy from its indirect effect on future power. A policy-endogenous (PE) equilibrium describes this endogenous transfer of power and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one's policy choice did not affect one's political fortunes. However, the reformation effect induces "more aggressive" policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics--political power that progressively evolves towards more fiscally liberal types of leaders--and cyclical Faustian dynamics--political power that oscillates between liberal and conservative types of leaders. In each case, we show that the Faustian trade-off moderates the choices of each type of leader. Copyright 2011, Oxford University Press.

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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 78 (2011)
Issue (Month): 1 ()
Pages: 17-48

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Handle: RePEc:oup:restud:v:78:y:2011:i:1:p:17-48

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Cited by:
  1. Ruediger Bachmann, 2011. "Public Consumption Over the Business Cycle," 2011 Meeting Papers 701, Society for Economic Dynamics.
  2. Taiji Furusawa & Edwin L.-C. Lai, 2011. "A Theory of Government Procrastination," CESifo Working Paper Series 3680, CESifo Group Munich.
  3. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
  4. Marina Azzimonti, 2011. "The dynamics of public investment under persistent electoral advantage," Working Papers 11-23, Federal Reserve Bank of Philadelphia.
  5. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
  6. Messner, Matthias & Polborn, Mattias K., 2012. "The option to wait in collective decisions and optimal majority rules," Journal of Public Economics, Elsevier, vol. 96(5), pages 524-540.
  7. Jean Guillaume Forand & John Duggan, 2013. "Markovian Elections," Working Papers 1305, University of Waterloo, Department of Economics, revised Oct 2013.
  8. marina, azzimonti, 2010. "Political ideology as a source of business cycles," MPRA Paper 25937, University Library of Munich, Germany.
  9. Ruediger Bachmann & Jinhui Bai, 2010. "Government Purchases Over the Business Cycle: the Role of Economic and Political Inequality," NBER Working Papers 16247, National Bureau of Economic Research, Inc.
  10. Battaglini, Marco, 2014. "A dynamic theory of electoral competition," Theoretical Economics, Econometric Society, vol. 9(2), May.
  11. Evrenk, Haldun, 2011. "Why a clean politician supports dirty politics: A game-theoretical explanation for the persistence of political corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 498-510.

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