Political ideology as a source of business cycles

marina, azzimonti (2010): Political ideology as a source of business cycles.

Abstract

When the government must decide not only on broad public-policy programs but also on the provision of group-specific public goods, dynamic strategic inefficiencies arise. The struggle between opposing groups–that disagree on the composition of expenditures and compete for office–results in governments being endogenously short-sighted: systematic under-investment in infrastructure and overspending on public goods arises, as resources are more valuable when in power. This distorts allocations even under lump-sum taxation. Ideological biases create asymmetries in the group’s relative political power generating endogenous economic cycles in an otherwise deterministic environment. Volatility is non-monotonic in the size of the bias and is an additional source of inefficiency.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public Investment, Commitment, Probabilistic Voting, Markov Equilibrium, Political Cycles, Time Consistency.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination

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