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  3. American Economic Review
  4. August 2011
  5. Barriers to Investment in Polarized Societies

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Barriers to Investment in Polarized Societies

  • Marina Azzimonti
American Economic Review
vol. 101, no. 5, August 2011
(pp. 2182–2204)
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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

Citation

Azzimonti, Marina. 2011. "Barriers to Investment in Polarized Societies." American Economic Review, 101 (5): 2182–2204. DOI: 10.1257/aer.101.5.2182

JEL Classification

  • 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