Social Conflict and Gradual Political Succession: An Illustrative Model

This paper studies the evolution of political institutions in the face of conflict. We examine institutional reform in a class of pivotal mechanisms — institutions that behave as if the resulting policy were determined by a “pivotal” decision maker drawn from the potential population of citizens and who holds full policy-making authority at the time. A rule-of-succession describes the process by which pivotal decision makers in period t + 1 are, themselves, chosen by pivotal decision makers in period t. Two sources of conflict - class conflict, arising from differences in wealth, and ideological conflict, arising from differences in preferences are examined. In each case, we characterize the unique Markov Perfect Equilibrium of the associated dynamic political game, and show that public decision-making authority evolves monotonically downward in wealth and upward in ideological predisposition toward the public good. We then examine rules-of-succession when ideology and wealth exhibit correlation.Social Conflict, Rule of Succession, Dynamic political game

The Folk Theorem in Dynastic Repeated Games

A canonical interpretation of an infinitely repeated game is that of a "dynastic" repeated game: a stage game repeatedly played by successive generations of finitely-lived players with dynastic preferences. These two models are in fact equivalent when the past history of play is observable to all players. In our model all players live one period and do not observe the history of play that takes place before their birth, but instead receive a private message from their immediate predecessors. Under very mild conditions, when players are sufficiently patient, all feasible payoff vectors (including those below the minmax) can be sustained as a Sequential Equilibrium of the dynastic repeated game with private communication. The result applies to any stage game for which the standard Folk Theorem yields a payoff set with a non-empty interior. Our results stem from the fact that, in equilibrium, a player may be unable to communicate effectively relevant information to his successor in the same dynasty. This, in turn implies that following some histories of play the players' equilibrium beliefs may violate "Inter-Generational Agreement."Dynastic Repeated Games, Private Communication, Folk Theorem

Solving General Equilibrium Models with Incomplete Markets and Many Assets

This paper presents a new numerical method for solving general equilibrium models with many assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete markets. It also can be used to study models where the equilibrium dynamics are non-stationary. We illustrate how the method is used by solving a one— and two-sector versions of a two—country general equilibrium model with production. We check the accuracy of our method by comparing the numerical solution to the one-sector model against its known analytic properties. We then apply the method to the two-sector model where no analytic solution is available.Portfolio Choice; Perturbation Methods; Incomplete Markets; Asset Prices.