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American Economic Review: Vol. 101 No. 5 (August 2011)

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Barriers to Investment in Polarized Societies

Article Citation

Azzimonti, Marina. 2011. "Barriers to Investment in Polarized Societies." American Economic Review, 101(5): 2182-2204.

DOI: 10.1257/aer.101.5.2182

Abstract

I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. Excessive taxation reduces the return to physical capital and hence investment rates, which slows down growth along the transition. In the long run, output, consumption and welfare are inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies. JEL: D72, E22, E23, E62, H25, O16, O17

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Azzimonti, Marina (U TX)

JEL Classifications

D72: Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E62: Fiscal Policy
H25: Business Taxes and Subsidies including sales and value-added (VAT)
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O17: Formal and Informal Sectors; Shadow Economy; Institutional Arrangements


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