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Political Institutions and the Dynamics of Investment

Battaglia, Marco and Nunnari, Salvatore and Palfrey, Thomas R. (2010) Political Institutions and the Dynamics of Investment. Social Science Working Paper, 1318. California Institute of Technology , Pasadena, CA.

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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.

Item Type:Report or Paper (Working Paper)
Palfrey, Thomas R.0000-0003-0769-8109
Additional Information:We thank Abhijit Banerjee, Craig Volden, and Lydia Mechtenberg for detailed comments. We are also grateful for comments from seminar audiences at Bocconi University, University of Chicago, University of Melbourne, the 2009 International CAS/NES Workshop on Rationality, Behaviour and Experiments in Moscow, the 2009 Wallis Conference in Rochester, the Conference on Theory and Field Experiments in Political Economy at Harvard University, the Australian Public Choice Conference 2009 in Melbourne, and the 2010 Winter Meeting of the Econometric Society in Atlanta. We thank Dustin Beckett for research assistance. Battaglini gratefully acknowledges financial support from NSF (SES-0418150) and the Alfred P. Sloan Foundation. Palfrey gratefully acknowledges financial support from NSF (SES-0547748 and SES-0617820) and The Gordon and Betty Moore Foundation.
Group:Social Science Working Papers
Funding AgencyGrant Number
NSF CAREER AwardSES-0547748
Alfred P. Sloan FoundationUNSPECIFIED
The Gordon and Betty Moore FoundationUNSPECIFIED
Subject Keywords:Dynamic political economy, voting, public goods, bargaining, experiments
Series Name:Social Science Working Paper
Issue or Number:1318
Classification Code:JEL: D71, D72, C78, C92, H41, H54
Record Number:CaltechAUTHORS:20170726-162558894
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79465
Deposited By: Jacquelyn Bussone
Deposited On:26 Jul 2017 23:48
Last Modified:22 Nov 2019 09:58

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