Political Economy of Mechanisms

Authors

  • Daron Acemoglu,

    1. Dept. of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142-1347, U.S.A.; daron@mit.edu,
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  • Michael Golosov,

    1. Dept. of Economics, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142-1347, U.S.A.; golosov@mit.edu,
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  • Aleh Tsyvinski

    1. Economics Department, Harvard University, Cambridge, MA 02138, U.S.A.; tsyvinski@harvard.edu
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    • We thank Manuel Amador, Marios Angeletos, Abhijit Banerjee, Tamer Basar, Timothy Besley, Olivier Blanchard, Ricardo Caballero, V. V. Chari, Mathias Dewatripont, Emmanuel Farhi, Kenichi Fukushima, Caroline Hoxby, Larry Jones, Patrick Kehoe, Narayana Kocherlakota, Jonathan Levin, David Levine, Guido Lorenzoni, Asuman Ozdaglar, Gerard Padro-i-Miquel, Christopher Phelan, Andrew Postlewaite, Vasiliki Skreta, Robert Townsend, Pierre Yared, Muhamet Yildiz, three anonymous referees, and especially the editor, Eddie Dekel, for useful comments and suggestions. We also thank participants at numerous seminars and conferences for comments, and Georgy Egorov, Laura Feiveson, and Oleg Itskhoki for excellent research assistance. All three authors gratefully acknowledge financial support from the National Science Foundation.


Abstract

We study the provision of dynamic incentives to self-interested politicians who control the allocation of resources in the context of the standard neoclassical growth model. Citizens discipline politicians using elections. We show that the need to provide incentives to the politician in power creates political economy distortions in the structure of production, which resemble aggregate tax distortions. We provide conditions under which the political economy distortions persist or disappear in the long run. If the politicians are as patient as the citizens, the best subgame perfect equilibrium leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when politicians are less patient than the citizens, political economy distortions remain asymptotically and lead to positive aggregate labor and capital taxes.

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