IRREVERSIBLE INVESTMENTS, DYNAMIC INCONSISTENCY AND POLICY CONVERGENCE RUNE JANSEN HAGEN GAUTE TORSVIK CESIFO WORKING PAPER NO. 1910 CATEGORY 1: PUBLIC FINANCE FEBRUARY 2007
An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifo-group.de T
T
CESifo Working Paper No. 1910
IRREVERSIBLE INVESTMENTS, DYNAMIC INCONSISTENCY AND POLICY CONVERGENCE 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. JEL Code: E61, F21, H24, P16. Keywords: capital convergence.
mobility,
dynamic
Rune Jansen Hagen Department of Economics University of Bergen Fosswinckels gate 7 5006 Bergen Norway
[email protected]
inconsistency,
political
competition,
policy
Gaute Torsvik Department of Economics University of Bergen Fosswinckels gate 7 5006 Bergen Norway
[email protected]
January 12, 2007 We would like to thank participants at the European Public Choice Society’s Annual Meeting 2003 and a seminar at the University of Bergen for their helpful comments. Financial support from the Research Council of Norway is gratefully acknowledged.
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