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On the 'Faustian' Dynamics of Policy and Political Power

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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 un-couple 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 toward 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. Classification-JEL Codes: C73, C61, D72, H11

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~08-08-02.

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Date of creation: 02 Aug 2008
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Handle: RePEc:geo:guwopa:gueconwpa~08-08-02

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
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Keywords: Monotone and cyclical Faustian dynamics; policy-endogenous equilibrium; permanent authority; preservation and reformation effects; biased political system; distortion-adjusted Euler equation;

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Cited by:
  1. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
  2. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers 8633, C.E.P.R. Discussion Papers.
  3. Ruediger Bachmann & Jinhui Bai, 2011. "Public Consumption Over the Business Cycle," NBER Working Papers 17230, National Bureau of Economic Research, Inc.
  4. Marina Azzimonti, 2012. "The dynamics of public investment under persistent electoral advantag," 2012 Meeting Papers 91, Society for Economic Dynamics.
  5. Ruediger Bachmann & Jinhui Bai, 2012. "Online Appendix to "Politico-Economic Inequality and the Comovement of Government Purchases"," Technical Appendices 11-243, Review of Economic Dynamics.
  6. 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.
  7. 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.
  8. Jean Guillaume Forand & John Duggan, 2013. "Markovian Elections," Working Papers 1305, University of Waterloo, Department of Economics, revised Oct 2013.
  9. 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.
  10. marina, azzimonti, 2010. "Political ideology as a source of business cycles," MPRA Paper 25937, University Library of Munich, Germany.
  11. Taiji Furusawa & Edwin L.-C. Lai, 2011. "A Theory of Government Procrastination," CESifo Working Paper Series 3680, CESifo Group Munich.

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