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Finite Horizons, Political Economy, and Growth

By James A. Kahn and Jong-soo Lim

Abstract

on Economics and Politics for helpful discussions. The views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New This paper analyzes the political economy of growth when agents and the government have finite horizons and equilibrium growth is inefficient. A “representative ” government (i.e. one whose preferences reflect those of its constituents) endowed merely with the ability to tax and transfer can improve somewhat on the market allocation, but cannot achieve first-best growth. Efficiency requires in addition the ability to bind future governments. We argue that this ability is related to political stability, and provide empirical evidence that stability and growth-related policies (namely education) are meaningfully related. Recent research on economic growth has found a negative relationship between political instability and growth. 1 If causal, this correlation could come from either the direct impact of instability (the impact of wars or revolutions, for example, on the physical and human capital stocks), or from the indirect impact through its effect on government decision-making. Instability could give rise to shortsightedness o

Year: 2000
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