Journal Article

On the Faustian Dynamics of Policy and Political Power

Jinhui H. Bai and Roger Lagunoff

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 1, pages 17-48
Published in print January 2011 | ISSN: 0034-6527
Published online January 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdq022
On the Faustian Dynamics of Policy and Political Power

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  • Game Theory and Bargaining Theory
  • Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling
  • Public Economics
  • Analysis of Collective Decision-making

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This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following “Faustian trade-off”: if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot uncouple the direct effect of his policy from its indirect effect on future power. A policy-endogenous (PE) equilibrium describes this endogenous transfer of power and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one's policy choice did not affect one's political fortunes. However, the reformation effect induces “more aggressive” policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics—political power that progressively evolves towards more fiscally liberal types of leaders—and cyclical Faustian dynamics—political power that oscillates between liberal and conservative types of leaders. In each case, we show that the Faustian trade-off moderates the choices of each type of leader.

Keywords: Monotone and cyclical Faustian dynamics; policy-endogenous equilibrium; permanent authority; preservation and reformation effects; distortion-adjusted Euler equation; C73; C61; D72; H11

Journal Article.  14311 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling ; Public Economics ; Analysis of Collective Decision-making

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