Finite horizons, political economy, and growth

Abstract: This paper analyzes the political economy of growth when agents and the government have finite horizons and equilibrium growth is inefficient. A "representative" government (that is, one whose preferences reflect those of its constituents) endowed merely with the ability to tax and transfer can improve somewhat on the market allocation but cannot achieve first-best growth. Efficiency requires in addition the ability to bind future governments. We argue that this ability is related to political stability, and provide empirical evidence that stability and growth-related policies (namely education) are meaningfully related.

Keywords: Economic development; Political science; public expenditures;

JEL Classification: D9; H3; O5;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2000-04-01

Number: 102

Note: For a published version of this report, see James A. Kahn and Jong-Soo Lim, "Finite Horizons, Political Economy, and Growth," Review of Economic Dynamics 4, no. 1 (January 2001): 1-25.