This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following "Faustian trade off": if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot un-couple the direct effect of his policy from its indirect effect on future power.A Policy-endogenous (PE) equilibrium describes this endogenous transfer of power, and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one's policy choice did not affect one's political fortunes. However, the reformation effect induces "more aggressive" policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics -political power that progressively evolves toward more fiscally liberal types of leaders, and cyclical Faustian dynamics -political power that oscillates between liberal and conservative types of leaders. In each case, we show that the Faustian trade off moderates the choices of each type of leader.JEL Codes: C73, C61, D72, H11
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. What fraction of the business cycle volatility of government purchases is accounted for as endogenous reactions to overall macroeconomic conditions? We answer this question in the framework of a neoclassical representative household model where the provision of a public consumption good is decided upon endogenously and in a time-consistent fashion. A simple version of such a model with aggregate productivity as the sole driving force fails to match important features of the business cycle dynamics of public consumption, which comes out as not as volatile and persistent as in the data and too synchronized with the cycle. We add implementation lags and implementation costs in the budgeting process to the model, plus taste shocks for public consumption relative to private consumption, and achieve a better fit to the data. All these ingredients are essential to improve the fit. In our baseline specification 50% of the variance of public consumption is driven by aggregate productivity shocks. Terms of use: Documents in EconStor may
This paper explores the implications of economic and political inequality for the business cycle comovement of government purchases. We set up and compute a heterogeneous-agent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth bias in the political aggregation process. When calibrated to U.S. wealth inequality and exposed to aggregate productivity shocks, such a model is able to generate milder procyclicality of government purchases than models with no political wealth bias. The degree of wealth bias that matches the observed mild procyclicality of government purchases in the data, is consistent with cross-sectional data on political participation. R2 Baseline Case, θ = 0.815, χ = 0.55 z 1 0.1215 0.0266 0.9778 0.0741 0.0096 0.9995 z 2 0.1168 0.0230 0.9724 0.0744 0.0097 0.9993 z 3 0.1145 0.0257 0.9807 0.0747 0.0098 0.9994 z 4 0.1127 0.0327 1.0013 0.0739 0.0097 0.9994 z 5 0.1060 0.0348 1.0049 0.0726 0.0096 0.9993 G-calibration, θ = 0.72, χ = 0.65 z 1 0.1582 0.0213 0.9755 0.1047 0.0147 0.9997 z 2 0.1536 0.0179 0.9712 0.1059 0.0150 0.9995 z 3 0.1508 0.0201 0.9783 0.1063 0.0152 0.9995 z 4 0.1477 0.0267 0.9968 0.1047 0.0151 0.9995 z 5 0.1409 0.0313 1.0056 0.1027 0.0148 0.9995 Majority Voting Case, θ = 0.82, χ = 0.79 z 1 0.1186 0.0257 0.9694 0.0739 0.0096 0.9994 z 2 0.1144 0.0233 0.9668 0.0740 0.0096 0.9993 z 3 0.1126 0.0268 0.9779 0.0742 0.0097 0.9993 z 4 0.1117 0.0348 1.0021 0.0733 0.0096 0.9994 z 5 0.1050 0.0367 1.0059 0.0719 0.0095 0.9993Notes: z denotes aggregate productivity, which can achieve five discrete states: z 1 to z 5 , Table 10 in Appendix E. The KS equation for the natural logarithm of the Gini coefficient of capital is given by: logGi ni (k ) = a 0 (z)+ a 1 (z) log K + a 2 (z) logGi ni (k) + a 3 (z) logG + a 4 (z) logG 2 .
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