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Political Institutions and the Dynamics of Public Investment

Marco Battaglini (), Salvatore Nunnari () and Thomas Palfrey

No 142, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We present a theoretical model of the provision of a durable public good over an infinite horizon. In each period, there is a societal endowment of which each of n districts owns a share. This endowment can either be invested in the public good or consumed. We characterize the planner's optimal solution and time path of investment and consumption. We then consider alternative political mechanisms for deciding on the time path, and analyze the Markov perfect equilibrium of these mechanisms. One class of these mechanisms involves a legislature where representatives of each district bargain with each other to decide how to divide the current period's societal endowment between investment in the public good and transfers to each district. The second class of mechanisms involves the districts making independent decisions for how to divide their own share of the endowment between consumption and investment. We conduct an experiment to assess the performance of these mechanisms, and compare the observed allocations to the Markov perfect equilibrium.

Keywords: Dynamic political economy; voting; public goods; bargaining; experiments (search for similar items in EconPapers)
JEL-codes: D71 D72 C78 C92 H41 H54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pol
Date: 2010
References: Add references at CitEc
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