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On the 'Faustian' Dynamics of Policy and Political Power

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Abstract

This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following "Faustian trade off": if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot un-couple the direct effect of his policy from its indirect effect on future power. A Policy-endogenous (PE) equilibrium describes this endogenous transfer of power, and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one's policy choice did not affect one's political fortunes. However, the reformation effect induces "more aggressive" policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics -- political power that progressively evolves toward more fiscally liberal types of leaders, and cyclical Faustian dynamics -- political power that oscillates between liberal and conservative types of leaders. In each case, we show that the Faustian trade off moderates the choices of each type of leader.

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  • Jinhui Bai & Roger Lagunoff, 2008. "On the 'Faustian' Dynamics of Policy and Political Power," Working Papers gueconwpa~08-08-02, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~08-08-02
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    Cited by:

    1. Rüdiger Bachmann & Jinhui H. Bai, 2013. "Public consumption over the business cycle," Quantitative Economics, Econometric Society, pages 417-451.
    2. Natvik, Gisle J., 2013. "The political economy of fiscal deficits and government production," European Economic Review, Elsevier, vol. 58(C), pages 81-94.
    3. Taiji Furusawa & Edwin L.-C. Lai, 2011. "A Theory of Government Procrastination," CESifo Working Paper Series 3680, CESifo Group Munich.
    4. Bowen, T. Renee & Chen, Ying & Eraslan, Hülya & Zápal, Jan, 2017. "Efficiency of flexible budgetary institutions," Journal of Economic Theory, Elsevier, pages 148-176.
    5. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    6. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, pages 2182-2204.
    7. Rüdiger Bachmann & Jinhui H. Bai, 2013. "Public consumption over the business cycle," Quantitative Economics, Econometric Society, pages 417-451.
    8. Battaglini, Marco, 2014. "A dynamic theory of electoral competition," Theoretical Economics, Econometric Society.
    9. Forand, Jean Guillaume, 2014. "Two-party competition with persistent policies," Journal of Economic Theory, Elsevier, vol. 152(C), pages 64-91.
    10. Wioletta Dziuda & Antoine Loeper, 2016. "Dynamic Collective Choice with Endogenous Status Quo," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1148-1186.
    11. Marina Azzimonti, 2010. "Political ideology as a source of business cycles," 2010 Meeting Papers 647, Society for Economic Dynamics.
    12. 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.
    13. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers 1233, Society for Economic Dynamics.
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    16. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    17. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, pages 2182-2204.
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    More about this item

    Keywords

    Monotone and cyclical Faustian dynamics; policy-endogenous equilibrium; permanent authority; preservation and reformation effects; biased political system; distortion-adjusted Euler equation;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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