Finite Horizons,Political Economy,and Growth

This paper analyzes the political economy of growth when agents and the government have finite horizons and equilibrium growth is inefficient. A “representative” government (i.e., one whose preferences reflect those of its constituents) endowed merely with the ability to tax and transfer can improve somewhat on the market allocation, but cannot achieve first-best growth. Efficiency requires in addition the ability to bind future governments. We argue that this ability is related to political stability, and we provide empirical evidence that stability and growth-related policies (namely education) are meaningfully related. Journal of Economic Literature Classification Numbers: D9, H3, O5.