Barriers to investment in polarized societies

Marina Azzimonti

MPRA Paper from University Library of Munich, Germany

Abstract: I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. The relative price of investment to consumption is excessively large in equilibrium due to over-taxation. Investment rates are too low which slows down growth along the transition. In the long run, this results in output, consumption and welfare being inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies.

Keywords: Barriers to Investment; Commitment; Probabilistic Voting; Markov Equilibrium; Time Consistency; Polarization; Speed of Convergence; Development. (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 H41 O23 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Barriers to Investment in Polarized Societies (2011)
Working Paper: Barriers to investment in polarized societies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:25936

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