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

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.