On the Co-Evolution of Policy and Political Power

This paper examines the dynamic evolution of policy and power. We posit a general (non-parametric) class of dynamic stochastic games in which a leader’s policy has distributional conse-quences that may alter the future balance of power. Policies such as taxes and public goods chosen by an authority in date t alter the economic fundamentals such as wealth distribution in date t+ 1. Changes in the distribution of wealth change the balance of political power in t+ 1 which, in turn, determines the policy choices at that date. Because the current decision maker cannot de-couple the direct effect of his policy from its indirect effect on future power, a transfer of power can result. We refer to this as a case of policy-endogenous political power. Under policy-endogenous power, the current political authority crafts a “Faustian bargain ” from the following trade-off: if he chooses his preferred policy, then he sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his policy objectives in the present. We examine this trade-off in the set of smooth Markov Perfect equilibria. In each such equilibrium, the motives of a political leader can be decomposed into two basic rationales. The “political preservation effect ” induces the authority to choose “more conservatively ” than if his policy choice did not affect his political fortunes. However, the “reformation effect ” induces less conservative choices in order to exploit the gains from policies of more aggressive successors. We identify sufficient conditions under which policy-endogenous power differs from a regime in which power is permanent. The co-evolution of policy and power is illustrated in a parametric example