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Political ideology as a source of business cycles

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  • marina, azzimonti

Abstract

When the government must decide not only on broad public-policy programs but also on the provision of group-specific public goods, dynamic strategic inefficiencies arise. The struggle between opposing groups–that disagree on the composition of expenditures and compete for office–results in governments being endogenously short-sighted: systematic under-investment in infrastructure and overspending on public goods arises, as resources are more valuable when in power. This distorts allocations even under lump-sum taxation. Ideological biases create asymmetries in the group’s relative political power generating endogenous economic cycles in an otherwise deterministic environment. Volatility is non-monotonic in the size of the bias and is an additional source of inefficiency.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25937.

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Date of creation: Jun 2010
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Handle: RePEc:pra:mprapa:25937

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Keywords: Public Investment; Commitment; Probabilistic Voting; Markov Equilibrium; Political Cycles; Time Consistency.;

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