DRAFT

Ulric B. and Evelyn L. Bray Social Sciences Seminar

Tuesday, April 20, 2021
4:00pm to 5:00pm
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Online Event
Efficiency with Political Power Dynamics and Costly Policy Change
Hülya Eraslan, Ralph O'Connor Professor of Economics, Rice University,

Abstract: We consider a dynamic model in which two parties decide on a unidimensional policy in each period over an infinite horizon. The policy implemented in any period becomes the next status quo. Given the status quo, adjusting the policy upwards involves a cost that may differ between the party in power and the party out of power due to favoritism. A second source of tension is ideological: the two parties may be polarized in their ideal policies. We show that efficiency requires no policy reversals and we establish bounds on the efficient policies. We show that when polarization is high, there is a unique equilibrium which always results in an inefficient allocation due to perpetual policy reversals. When polarization is not high but favoritism is, equilibrium can be inefficient due to "overshooting" or "undershooting" as a result of coordination failures. When neither polarization nor favoritism is high, equilibrium is always efficient in the long run.

Written with Adriana Piazza.

For more information, or if you are interested in attending this online seminar, please contact Barbara Estrada by email at bestrada@caltech.edu.