Welcome to the new version of CaltechAUTHORS. Login is currently restricted to library staff. If you notice any issues, please email coda@library.caltech.edu
Published January 29, 2010 | Submitted
Report Open

Political Institutions and the Dynamics of Investment


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.

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.

Attached Files

Submitted - sswp1318.pdf


Files (890.4 kB)
Name Size Download all
890.4 kB Preview Download

Additional details

August 19, 2023
January 13, 2024