Working Paper: NBER ID: w15400
Authors: Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E61; H11; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ruling party's identity (D72) | resource allocation (H61) |
| high discount factors (H43) | first-best allocation (D61) |
| low discount factors (D15) | invariant stochastic distribution (C46) |
| invariant stochastic distribution (C46) | fluctuations in labor supply (J20) |
| invariant stochastic distribution (C46) | fluctuations in consumption levels (E21) |
| labor supply of groups not in power (J79) | deviation payoff of ruling party (D72) |
| less persistence in ruling party's identity (D72) | larger set of sustainable first-best allocations (D61) |
| stable political systems (P16) | fewer distortions (F12) |
| particular group remains in power for extended period (P26) | decrease in distortions (H21) |