Essays in dynamic political economy

Abstract

The dissertation consists of three essays on dynamic problems in political economy. The first essay studies motivated communication on networks. Agents have some hard information about the world and choose whether to tell their neighbors. Information received from other agents can be shared in later meetings. Agents' preferences are mis-aligned, tempting senders to lie by omission. The model yields three main conclusions. First, there is incomplete learning. Second, signals that are close to the mean are more likely to propagate. The reason is that moderate signals travel in both directions, whereas extreme signals are communicated in a predictable direction, which stifles their propagation. Third, if agents are forward-looking, concerns about informational cascades lead to segmentation: agents with close preferences hide information from each other to prevent it from traveling further. The second essay analyzes the evolution of organizations that allow free entry and exit of members, such as cities, trade unions, religious organizations and cooperatives. The organization chooses a policy, which influences the set of agents who want to become members, but current members decide policy in the next period. This generates feedback effects: an organization with a policy x may attract a population with a median-preferred policy higher than x, so a higher policy will be chosen in the next period; but the new policy will attract members wanting an even higher policy, and so on. The set of steady states is pinned down by the preference distribution; equilibrium paths converge to these steady states depending on the starting position. Unlike in models with a fixed population, a small change in the preference distribution can cause dramatic changes in the long-run policy. The third essay studies the impact of term limits on elections where biased candidates compete through ability investments and platform choice. Good politicians facing weak competition extract policy rents, which lowers welfare. Moreover, incumbents exacerbate rent extraction by deterring challenger entry. Term limits alleviate this problem by creating open elections. However, they also lower incumbent quality, so their overall impact is ambiguous. Strong limits are better when politicians are more biased, and challengers' entry cost is intermediate.