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Economic and Politico-Economic Equivalence

  • Gonzalez-Eiras, Martin
  • Niepelt, Dirk

We extend "economic equivalence" results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are "politico-economically equivalent" to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. The equivalence conditions help to identify factors that render institutional change non-neutral. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9203.

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Date of creation: Nov 2012
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Handle: RePEc:cpr:ceprdp:9203
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