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Department of Economics, University of Bergen Working Papers in Economics, Department of Economics, University of Bergen

No 02/07:
Irreversible investments, dynamic inconsistency and policy convergence

Rune Jansen Hagen () and Gaute Torsvik ()

Abstract: We study a model where two parties, one from the left and one from the right, compete for position. The election is to be held in the near future and the outcome is uncertain. Prior to the election, the members of both parties nominate their prime ministerial candidates. Investors care about the outcome since they may invest in irreversible domestic production capital. We find that there is political convergence in the nomination process. In some circumstances, it is only the median voter of the left-wing party that elects a more moderate candidate. In other instances, the members of both parties nominate more "conservative" candidates, but there is still convergence. We also show that a higher probability of the left winning the election increases the degree of convergence, while a more globalised economy (greater capital mobility) reduces it.

Keywords: Policy Objectives; Policy Designs and Consistency; Policy Coordination; International Investment; Long-Term Capital Movements; Personal Income and Other Nonbusiness Taxes and Subsidies; Political Economy.; (follow links to similar papers)

JEL-Codes: E61; F21; H24; P16; (follow links to similar papers)

21 pages, January 27, 2008

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