NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Power Fluctuations and Political Economy

Daron Acemoglu, Mikhail Golosov, Aleh Tsyvinski

NBER Working Paper No. 15400
Issued in October 2009
NBER Program(s):   EFG   PE   POL

We study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a “stable ruling group”. In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time.

download in pdf format
   (424 K)

email paper

This paper is available as PDF (424 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15400

Published: Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Power fluctuations and political economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1009-1041, May.

Users who downloaded this paper also downloaded these:
Acemoglu, Egorov, and Sonin w15230 Political Selection and Persistence of Bad Governments
Acemoglu w15944 Theory, General Equilibrium and Political Economy in Development Economics
Acemoglu, Golosov, and Tsyvinski w15302 Political Economy of Ramsey Taxation
Acemoglu and Yared w15694 Political Limits to Globalization
Acemoglu and Robinson w12108 Persistence of Power, Elites and Institutions
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us