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American Economic Review: Vol. 101 No. 5 (August 2011)
AER Volume. 101, Issue 5 | 
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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
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
Article Full-Text Access
Full-text Article
Authors
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
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
