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Power Fluctuations and Political Economy

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  • Daron Acemoglu
  • Mikhail Golosov
  • Aleh Tsyvinski

Abstract

We study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a “stable ruling group”. In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15400.

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Date of creation: Oct 2009
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Publication status: published as Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Power fluctuations and political economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1009-1041, May.
Handle: RePEc:nbr:nberwo:15400

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References

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Cited by:
  1. 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.
  2. Marcet, A. & Marimon, R., 1998. "Recursive Contracts," Economics Working Papers, European University Institute eco98/37, European University Institute.
  3. Corbae, Dean & Marimon, Ramon, 2011. "Introduction to Incompleteness and Uncertainty in Economics," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(3), pages 775-784, May.
  4. Bowen, T. Renee & Chen, Ying & Eraslan, Hulya, 2012. "Mandatory versus Discretionary Spending: The Status Quo Effect," Research Papers, Stanford University, Graduate School of Business 2121, Stanford University, Graduate School of Business.
  5. Saint-Paul, Gilles & Ticchi, Davide & Vindigni, Andrea, 2012. "A Theory of Political Entrenchment," TSE Working Papers, Toulouse School of Economics (TSE) 12-284, Toulouse School of Economics (TSE).
  6. Chatterjee, Satyajit & Eyigungor, Burcu, 2014. "Continuous Markov equilibria with quasi-geometric discounting," Working Papers 14-6, Federal Reserve Bank of Philadelphia.
  7. Leonid Polishchuk & Georgiy Syunyaev, 2013. "Ruling elites' rotation and asset ownership: Implications for property rights," HSE Working papers, National Research University Higher School of Economics WP BRP 43/EC/2013, National Research University Higher School of Economics.

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