Credible Communication in Dynastic Government

This paper examines the mechanics of intertemporal information provision in dynastic governments. It has been suggested that "horizontal accountability," i.e., a system of governance where auditing functions lie outside the executive branch, can ensure credible disclosure of information. The results here suggest a cautious approach to that view. Government is modelled as a dynastic sequence of regimes. Each regime rules for one period, chooses an expenditure level, then relinquishes power to its successor. When information about past policy choices comes exclusively from the reports of previous regimes, each regime has an incentive to choose its (suboptimal) one shot expenditure policy, and then misrepresent its choice to its successor. I examine the credible communication equilibria taking into account the reporting incentives of an auditor who can independently verify the information each period. In an environment where "liberal" (i.e., those prefering larger government expenditures) and "conservative" (those prefering smaller expenditures) regimes and auditors evolve over time, it is shown that: "conservative" ("liberal") auditors are not credible when the current regime is also "conservative" ("liberal"). Moreover, because information transmission stops when the auditor's and the regime's biases coincide, e_ective deterrents even in the "good" periods (when the auditor's and the regime's biases di_er) are di_cult to construct. In all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for e_cient policy choices. The main result shows that these constraints typically bind away from optimal policies in standard constructions of equilibrium.dynastic government, dynamic policy bias, auditor neutrality, credible communication.

The Dynamic Reform of Political Institutions

This paper formulates a model of dynamic, endogenous reform of political institutions. Specifically, a class of dynamic political games (DPGs) is introduced in which institutional choice is both recursive and instrumental. It is recursive because future political institutions are decided under current ones. The process is instrumental because institutional choices do not affect payoffs or technology directly. DPGs provide a broad framework to address the question: which environments exhibit institutional reform? Which tend toward institutional stability? In any state, private (public) sector decisions are essential if, roughly, they cannot always be replaced by decisions in the public (private) sector. We prove that institutional reform occurs if public sector decisions are not essential. Conversely, private sector decisions are essential if institutional reform occurs. The results suggest that a relatively more effective public sector is conducive to institutional stability, while a more effective private sector is conducive to change. We also show that if the political rules satisfy a dynamic consistency property, then the game admits ``political fixed points" of a recursive map from future (state-contingent) decisions rules to current ones. Since existence of political fixed points is a necessary condition of equilibrium, we apply the result to prove two equilibrium existence theorems, one of which implies that private and public sector decision rules that are smooth functions of the economic state.institutional reform, recursive, instrumental, dynamic political games, political fixed points.

Markov Equilibrium in Models of Dynamic Endogenous Political Institutions

This paper examines existence of Markov equilibria in the class of dynamic political games (DPGs). DPGs are dynamic games in which political institutions are endogenously determined each period. The process of change is both recursive and instrumental: the rules for political aggregation at date t+1 are decided by the rules at date t, and the resulting institutional choices do not affect payoffs or technology directly. Equilibrium existence in dynamic political games requires a resolution to a “political fixed point problem” in which a current political rule (e.g., majority voting) admits a solution only if all feasible political rules in the future admit solutions in all states. If the class of political rules is dynamically consistent, then DPGs are shown to admit political fixed points. This result is used to prove two equilibrium existence theorems, one of which implies that equilibrium strategies, public and private, are smooth functions of the economic state. We discuss practical applications that require existence of smooth equilibria.Recursive, dynamic political games, political fixed points, dynamically consistent rules.

The Dynamic Reform of Political Institutions

This paper introduces a class of games designed to study dynamic, endogenous reform of political institutions. Dynamic political games (DPGs) are dynamic games in which institutional choice is both recursive and instrumental. Future political aggregation rules are decided under current ones, and institutional choices do not affect payoffs or technology directly. We examine properties of the Markovian equilibria of DPGs. In any equilibrium, institutional reform occurs if the subsequent political rule is chosen to be different than the present one. Which environments exhibit institutional reform and which tend toward institutional stability? Private (public) sector decisions are said to be inessential if, roughly, they can always be replaced by decisions in the public (private) sector in a social planner's payoff. We show that if the private sector is inessential, then institutional reform never occurs. However, if public sector decisions are inessential, then institutional reform must occur. The result suggests that an ineffective private sector is conducive to institutional stability, while an ineffective public sector is conducive to change. We also address the ``political fixed point problem" that arises in a model of recursive institutional choice. Namely, the current political rule (e.g., majority voting) admits a solution only if all feasible political rules admit solutions in all future dates. If the class of political rules is dynamically consistent then DPGs are shown to admit political fixed points. This result is used to prove two equilibrium existence theorems, one of which implies that all decision rules are smooth functions of the economic stateRecursive, dynamic political games, institutional reform, political fixed points, inessential.

Dynamic Stability and Reform of Political Institutions

This paper studies dynamic, endogenous institutional change. We introduce the class of dynamic political games (DPGs), dynamic games in which future political aggregation rules are decided under current ones, and the resulting institutional choices do not affect payoffs or technology directly. A companion paper (Lagunoff (2005b)) establishes existence of Markov Perfect equilibria of dynamic political games. The present paper examines issues of stability and reform when such equilibria exist. Which environments tend toward institutional stability? Which tend toward reform? We show that when political rules are dynamically consistent and private sector decisions areinessential,reform never occurs: all political rules are stable. Roughly,private sector decisions are inessential if any feasible ``social' continuation payoff can achieved by public sector decisions alone. More generally, we identify sufficient conditions for stability and reform in terms of recursive self selection and recursive self denial,incentive compatibility concepts that treat the rules themselves as ``players' who can strategically delegate future policy-making authority to different institutional types. These ideas are illustrated in an example of dynamic public goods provision.Recursive, dynamic political games, institutional reform, stability, dynamically consistent rules, inessential, recursive self selection.

Credible Communication in Dynastic Government

It has been suggested that ``horizontal accountability," i.e., a system of governance where auditing functions lie outside the executive branch, can ensure credible disclosure of information. This paper examines a model of intertemporal information provision in government that suggests a cautious approach to that view. Government consists of a succession of regimes, each ruling for one period before relinquishing power to a successor. Without external auditing, credible communication cannot be sustained. Hence, expenditure policies are suboptimal. Even with external auditing, credible communication requires ideological conflicts between the auditor and the regime. Moreover, because information transmission stops when the auditor's and the regime's biases coincide, effective deterrents even in the ``good" periods (when the auditor's and the regime's biases differ) are difficult to construct. As a result, in standard constructions of equilibrium, efficient policy choices are shown to be unsustainabledynastic government, dynamic policy bias, auditor neutrality, credible communication

One Size and Structure of Group Cooperation

This paper examines characteristics of cooperative behavior in a repeated, n-person, continuous action generalization of a Prisoner's Dilemma game. When time preferences are heterogeneous and bounded away from one, how "much" cooperation can be achieved by an ongoing group? How does group cooperation vary with the group's size and structure? For an arbitrary distribution of discount factors, we characterize the maximal average cooperation (MAC) likelihood of this game. The MAC likelihood is the highest average level of cooperation, over all stationary subgame perfect equilibrium paths, that the group can achieve. The MAC likelihood is shown to be increasing in monotone shifts, and decreasing in mean preserving spreads, of the distribution of discount factors. The latter suggests that more heterogeneous groups are less cooperative on average. Finally, we establish weak conditions under which the MAC likelihood exhibits increasing returns to scale when discounting is heterogeneous. That is, larger groups are more cooperative, on average, than smaller ones. By contrast, when the group has a common discount factor, the MAC likelihood is invariant to group size.Repeated games, maximal average cooperation likelihood, heterogeneous discount factors, returns to scale

On the Size and Structure of Group Cooperation

This paper examines characteristics of cooperative behavior in a repeated, n-person, continuous action generalization of a Prisoner's Dilemma game. When time preferences are heterogeneous and bounded away from one, how does group cooperation vary with the group's size and structure? For an arbitrary distribution of discount factors, we characterize the maximal average cooperation (MAC) likelihood of this game. The MAC likelihood is the highest average level of cooperation, over all stationary subgame perfect equilibrium paths, in the group. We show that the MAC likelihood is increasing in monotone shifts, and decreasing in mean preserving spreads, of the distribution of discount factors. This suggests that more heterogeneous groups are less cooperative. Finally, we show under certain conditions that the MAC likelihood exhibits increasing returns to scale when discounting is heterogeneous: larger groups are more cooperative than smaller ones. By contrast, when discounting is homogeneous, the MAC likelihood is invariant to group size.Repeated games, maximal average cooperation likelihood, heterogeneous discount factors, returns to scale