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On the ``Faustian Dynamics" of Policy and Political Power

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  • Roger Lagunoff

    (Georgetown University)

  • Jinhui Bai

    (Georgetown University)

Abstract

Because the current ruler cannot un-couple the direct effect of his policy from its indirect effect on future power, a transfer of power can result in equilibrium. We refer to this as a case of policy-endogenous (PE) political power, and the associated Markov equilibria as PE equilibria. In a PE equilibrium, the current political ruler finds it necessary to craft a "Faustian bargain" from the following trade-off: if he chooses his preferred policy, then he sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. We show that these motives can be decomposed into two basic rationales. The political preservation effect induces the authority to choose "more conservatively" than if his policy choice did not affect his political fortunes. However, the reformation effect induces less conservative choices in order to exploit the gains from policies of more aggressive successors. The balance of these effects produces what we call Faustian dynamics: conservative individual decisions that are consistent with progressive outcome paths resulting from an evolution of political power toward more progressive types. Faustian dynamics are illustrated in a parametric model of public investment and income inequality.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 456.

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Date of creation: 2008
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Handle: RePEc:red:sed008:456

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Cited by:
  1. Rüdiger Bachmann & Jinhui H. Bai, 2013. "Public consumption over the business cycle," Quantitative Economics, Econometric Society, vol. 4(3), pages 417-451, November.
  2. 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.
  3. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers 8633, C.E.P.R. Discussion Papers.
  4. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers 1233, Society for Economic Dynamics.
  5. 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.
  6. 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.
  7. marina, azzimonti, 2010. "Political ideology as a source of business cycles," MPRA Paper 25937, University Library of Munich, Germany.
  8. Jean Guillaume Forand & John Duggan, 2013. "Markovian Elections," Working Papers 1305, University of Waterloo, Department of Economics, revised Oct 2013.
  9. Taiji Furusawa & Edwin L.-C. Lai, 2011. "A Theory of Government Procrastination," CESifo Working Paper Series 3680, CESifo Group Munich.
  10. Marina Azzimonti, 2011. "The dynamics of public investment under persistent electoral advantage," Working Papers 11-23, Federal Reserve Bank of Philadelphia.
  11. 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.

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