The dynamics of public investment under persistent electoral advantage

This paper studies the effects of asymmetries in re-election probabilities across parties on public policy and its subsequent propagation to the economy. The struggle between opposing groups — that disagree on the composition of public consumption — results in governments being endogenously short-sighted: Systematic under investment in infrastructure and overspending on public goods arise, as resources are more valuable when in power. Because the party enjoying an electoral advantage is relatively less short-sighted, it devotes a larger proportion of government revenues to productive public investment. Political turnover, together with asymmetric policy choices, induces economic fluctuations in an otherwise deterministic environment. The author characterizes the long-run distribution of capital and shows that output increases on average with political advantage, despite the fact that the size of the government expands as a percentage of GDP. Volatility, on the other hand, is non-monotonic in political power and is an additional source of inefficiency.Political science ; Expenditures, Public

Barriers to investment in polarized societies

I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. The relative price of investment to consumption is excessively large in equilibrium due to over-taxation. Investment rates are too low which slows down growth along the transition. In the long run, this results in output, consumption and welfare being inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies.Barriers to Investment, Commitment, Probabilistic Voting, Markov Equilibrium, Time Consistency, Polarization, Speed of Convergence, Development.

Partisan cycles and the consumption volatility puzzle

Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper the authors provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle,’ based on political frictions. They develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks affect only consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. Since emerging economies are characterized by less stable governments and more polarized societies, the effects of political shocks are more pronounced. For a reasonable set of parameters the authors confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries.Business cycles ; Developing countries

Barriers to foreign direct investment under political instability

Investments, Foreign ; Developing countries

On the Case for a Balanced Budget Amendment to the U.S. Constitution

This paper uses the political economy model of Battaglini and Coate (2008) to analyze the impact of a balanced budget rule that requires that legislators do not run deficits. It considers both a strict rule which cannot be circumvented and a rule that can be overridden by a super-majority of legislators. A strict rule leads to a gradual but substantial reduction in the level of public debt. In the short run, citizens will be worse off as public spending is reduced and taxes are raised to bring down debt. In the long run, the benefits of a lower debt burden must be weighed against the costs of greater volatility in taxes and less responsive public good provision. To quantify these effects, the model is calibrated to the U.S. economy using data from 1940-2005. While the long run net benefits are positive, they are outweighed by the short run costs of debt reduction. A rule with a super-majority override has no effect on citizen welfare or fiscal policy.Balanced Budget Amendment, Political Economy, Markov Equilibrium, Bargaining

Optimal Fiscal Policy and the (Lack of) Time Inconsistency Problem

Time-consistency, Markov Equilibrium, Public Debt

Barriers to investment in polarized societies

I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. The relative price of investment to consumption is excessively large in equilibrium due to over-taxation. Investment rates are too low which slows down growth along the transition. In the long run, this results in output, consumption and welfare being inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies

Barriers to investment in polarized societies

I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. The relative price of investment to consumption is excessively large in equilibrium due to over-taxation. Investment rates are too low which slows down growth along the transition. In the long run, this results in output, consumption and welfare being inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies

Political ideology as a source of business cycles

When the government must decide not only on broad public-policy programs but also on the provision of group-specific public goods, dynamic strategic inefficiencies arise. The struggle between opposing groups–that disagree on the composition of expenditures and compete for office–results in governments being endogenously short-sighted: systematic under-investment in infrastructure and overspending on public goods arises, as resources are more valuable when in power. This distorts allocations even under lump-sum taxation. Ideological biases create asymmetries in the group’s relative political power generating endogenous economic cycles in an otherwise deterministic environment. Volatility is non-monotonic in the size of the bias and is an additional source of inefficiency

Political ideology as a source of business cycles

When the government must decide not only on broad public-policy programs but also on the provision of group-specific public goods, dynamic strategic inefficiencies arise. The struggle between opposing groups–that disagree on the composition of expenditures and compete for office–results in governments being endogenously short-sighted: systematic under-investment in infrastructure and overspending on public goods arises, as resources are more valuable when in power. This distorts allocations even under lump-sum taxation. Ideological biases create asymmetries in the group’s relative political power generating endogenous economic cycles in an otherwise deterministic environment. Volatility is non-monotonic in the size of the bias and is an additional source of inefficiency