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Power fluctuations and political economy

  • Acemoglu, Daron
  • Golosov, Mikhail
  • Tsyvinski, Aleh

We study (constrained) Pareto efficient allocations in a dynamic production economy where the group that holds political power decides the allocation of resources. For high discount factors, the economy converges to a first-best allocation where labor supply decisions are not distorted. For low discount factors, distortions do not disappear and fluctuate over time. Most importantly, the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power (because this encourages political compromise). This result contradicts the common presumption that there will be fewer distortions when there is a "stable ruling group".

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 3 (May)
Pages: 1009-1041

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Handle: RePEc:eee:jetheo:v:146:y:2011:i:3:p:1009-1041
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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