The Dynamic Reform of Political Institutions

This paper introduces a class of games designed to study dynamic, endogenous reform of political institutions. Dynamic political games (DPGs) are dynamic games in which institutional choice is both recursive and instrumental. Future political aggregation rules are decided under current ones, and institutional choices do not affect payoffs or technology directly. We examine properties of the Markovian equilibria of DPGs. In any equilibrium, institutional reform occurs if the subsequent political rule is chosen to be different than the present one. Which environments exhibit institutional reform and which tend toward institutional stability? Private (public) sector decisions are said to be inessential if, roughly, they can always be replaced by decisions in the public (private) sector in a social planner's payoff. We show that if the private sector is inessential, then institutional reform never occurs. However, if public sector decisions are inessential, then institutional reform must occur. The result suggests that an ineffective private sector is conducive to institutional stability, while an ineffective public sector is conducive to change. We also address the ``political fixed point problem" that arises in a model of recursive institutional choice. Namely, the current political rule (e.g., majority voting) admits a solution only if all feasible political rules admit solutions in all future dates. If the class of political rules is dynamically consistent then DPGs are shown to admit political fixed points. This result is used to prove two equilibrium existence theorems, one of which implies that all decision rules are smooth functions of the economic state