Working Papers in Economics, Department of Economics, University of Bergen
Rune Jansen Hagen
Irreversible investments, dynamic inconsistency and policy convergence
() 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)
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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