Essays on Dynamic Political Economy

Citation

Nunnari, Salvatore (2012) Essays on Dynamic Political Economy. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/YZ75-CH25. https://resolver.caltech.edu/CaltechTHESIS:05292012-234329897

Abstract

This dissertation comprises three essays that are linked by their focus on dynamic models of political economy, in which farsighted agents interact over an infinite number of periods, and the strategic environment evolves endogenously over time.

In Chapter 2, "Dynamic Legislative Bargaining with Veto Power", I analyze the consequences of veto power in an infinitely repeated divide-the-dollar bargaining game with an endogenous status quo policy. I show that a Markov equilibrium of this dynamic game exists, and that, irrespective of the discount factor of legislators, their recognition probabilities, and the initial division of the dollar, policy eventually gets arbitrarily close to full appropriation of the dollar by the veto player.

Chapters 3 and 4 -- coauthored with Thomas Palfrey and Marco Battaglini -- study free riding in a dynamic environment where a durable public good provides a stream of benefits over time and agents have opportunities to gradually build the stock. We consider economies with reversibility, where investments can be positive or negative, and economies with irreversibility, where investments are non-negative and the public good can only be reduced by depreciation. In Chapter 3, "The Free Rider Problem: A Dynamic Analysis", we study and compare the set of Markov equilibria of these models. With reversibility, there is a continuum of equilibrium steady states: the highest equilibrium steady state of the public good is increasing in the group size, and the lowest is decreasing. With irreversibility, the set of equilibrium steady states converges to a unique point as depreciation converges to zero: the highest steady state possible with reversibility. In Chapter 4, "The Dynamic Free Rider Problem: An Experimental Study", we test the results from this model with controlled laboratory experiments. The comparative static predictions for the treatments are supported by the data: irreversible investment leads to significantly higher public good production than reversible investment.

Thesis Files