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Power Fluctuations And Political Economy

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Executive Summary

The authors study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. They show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another).

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