TY - JOUR AU - Acemoglu,Daron AU - Golosov,Mikhail AU - Tsyvinski,Aleh TI - Power Fluctuations and Political Economy JF - National Bureau of Economic Research Working Paper Series VL - No. 15400 PY - 2009 Y2 - October 2009 UR - http://www.nber.org/papers/w15400 L1 - http://www.nber.org/papers/w15400.pdf N1 - Author contact info: Daron Acemoglu Department of Economics MIT, E52-380B 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-1927 Fax: 617/253-1330 E-Mail: daron@mit.edu Mikhail Golosov Department of Economics Princeton University 111 Fisher Hall Princeton, NJ 08544 Tel: 609/258-4003 Fax: 609/258-6419 E-Mail: golosov@princeton.edu Aleh Tsyvinski Department of Economics Yale University Box 208268 New Haven, CT 06520-8268 E-Mail: a.tsyvinski@yale.edu AB - 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. ER -