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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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Web page: http://econ.georgetown.edu/

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Postal: Marcia Suss Administrative Officer 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, 2013. "The dynamics of public investment under persistent electoral advantage," Working Papers 13-43, Federal Reserve Bank of Philadelphia.
  2. 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.
  3. Ruediger Bachmann, 2011. "Public Consumption Over the Business Cycle," 2011 Meeting Papers 701, Society for Economic Dynamics.
  4. marina, azzimonti, 2010. "Political ideology as a source of business cycles," MPRA Paper 25937, University Library of Munich, Germany.
  5. marina, azzimonti, 2009. "Barriers to investment in polarized societies," MPRA Paper 25936, University Library of Munich, Germany.
  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. 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. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers 8633, C.E.P.R. Discussion Papers.
  9. Taiji Furusawa & Edwin L.-C. Lai, 2011. "A Theory of Government Procrastination," CESifo Working Paper Series 3680, CESifo Group Munich.
  10. Jean Guillaume Forand & John Duggan, 2013. "Markovian Elections," Working Papers 1305, University of Waterloo, Department of Economics, revised Oct 2013.
  11. 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.

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