What determines the size and form of redistributive programs, the extent and type of public goods provision, the burden of taxation across alternative tax bases, the size of government deficits, and the stance of monetary policy during the course of business and electoral cycles? A large and rapidly growing literature in political economics attempts to answer these questions. But so far there is little consensus on the answers and disagreement on the appropriate mode of analysis. Combining the best of three separate traditions--the theory of macroeconomic policy, public choice, and rational choice in political science--Torsten Persson and Guido Tabellini suggest a unified approach to the field. As in modern macroeconomics, individual citizens behave rationally, their preferences over economic outcomes inducing preferences over policy. As in public choice, the delegation of policy decisions to elected representatives may give rise to agency problems between voters and politicians. And, as in rational choice, political institutions shape the procedures for setting policy and electing politicians. The authors outline a common method of analysis, establish several new results, and identify the main outstanding problems.

I Tools of political economics

1

(54)

Preferences and institutions

3

(14)

Existence and non existence of a Condorcet winner under simple majority rule

3

(2)

Simple majority rule and uni-dimensional public consumption

5

(2)

Labor and consumption taxation

7

(2)

Multidimensional public consumption in the presence of a Condorcet winner

9

(4)

Structure induced equilibrium and multidimensional public consumption

13

(4)

Electoral competition

17

(10)

Non credible commitments and probabilistic voting

17

(2)

Downsian competition in a simple public good model

19

(1)

A simple model of probabilistic voting

20

(2)

Probabilistic voting in the presence of groups of voters

22

(3)

Lobbying

25

(2)

Agency

27

(14)

Political rents in lop-sided elections

27

(4)

Political rents with term limits

31

(2)

Electoral cycles with seignorage

33

(3)

Equilibrium selection in the adverse selection model

36

(2)

Challenger selection procedure

38

(3)

Partisan politicians

41

(14)

Probabilistic voting with outcome-seeking politicians

41

(2)

The citizen-candidate model

43

(2)

Lobbying in a representative democracy

45

(4)

Equilibria when the single-crossing condition is violated

49

(2)

The agenda-setting model

51

(2)

Rents with endogenous value of being in office

53

(2)

II Redistributive politics

55

(30)

General-interest politics

57

(14)

The Meltzer-Richard model

57

(2)

Pensions

59

(3)

Pensions and probabilistic voting

62

(3)

Unemployment insurance

65

(1)

Unemployment insurance with multiple equilibria

66

(5)

Special-interest politics

71

(14)

Legislative bargaining with amendment rights

71

(3)

Budgetary powers and amendments rights in legislatures

74

(2)

Truthful strategies in the lobbying model

76

(1)

Coalition formation in a three-party legislature

77

(3)

Legislative bargaining and lobbying

80

(5)

III Comparative Politics

85

(34)

Electoral Rules and Electoral Competition

87

(10)

Proportional elections and concave utility

87

(3)

Existence of majoritarian equilibria

90

(2)

Distortionary taxes and electoral competition

92

(1)

Districts and voter groups that do not coincide

93

(1)

Broad vs. Targeted policy

94

(3)

Institutions and Accountability

97

(10)

Local vs. national elections and externalities among local public goods

97

(3)

Yardstick competition

100

(1)

Groups with coordinated voting

101

(2)

Checks and balances with bilateral bargaining

103

(1)

Separation of powers and the common pool problem

104

(3)

Political Regimes

107

(12)

A model with a prime minister

107

(1)

Adding a president

108

(2)

Infinitely repeated presidential-congressional regime

110

(2)

The ``caretaker government'' subgame

112

(1)

Calculating the equilibria in the Parliamentary regime

113

(1)

Presidential regime with line-item veto

114

(5)

IV Dynamic politics

119

(60)

Dynamic policy problems

121

(16)

Debt structure, labor taxation and money

121

(3)

Credibility problems in labor taxation when government consumption is endogenous

124

(3)

Debt structure and labor taxation

127

(3)

Capital taxation and inflation surprise

130

(4)

Labor and capital taxation when agents are heterogeneous

134

(3)

Capital taxation

137

(16)

Multiple equilibria and credibility in taxation problems

137

(4)

Solving time-inconsistency problems through social contracts

141

(5)

Tax competition and international cooperation

146

(3)

The effects of capital mobility on taxation

149

(4)

Public debt

153

(16)

Preelection politics and government spending when parties are opportunistic

153

(3)

Population structure's influence on dynamic inconsistency

156

(3)

When there is overindebtedness

159

(2)

Endogenous (in) efficiency of the tax system

161

(3)

Voting on the budget deficit: Consequences of a balanced budget rule

164

(5)

Growth

169

(10)

Public debt, political instability and growth

169

(2)

Inequality and growth-human capital

171

(2)

Unions and taxation

173

(2)

Growth and the common-pool problem

175

(1)

Inequality and growth: a specific functional form for A(I)

176

(3)

V Monetary politics

179

Credibility of monetary policy

181

Reputation with state-dependent incentives

181

Optimal punishment rules

183

Reputation with incomplete information

185

The inflation and stabilization biases

188

Monetary policy with employment persistence

191

Inflation and default

196

Electoral cycles

201

Timing, moral hazard, adverse selection and the political business cycle

201

Partisan political competition and the strategic use of inflation

204

Monetary policy in majoritarian elections

208

Monetary policy in proportional elections

210

Institutions and incentives

213

Escape clauses within a simple rule

213

Endogenous credibility of the central bank

216

Political competition and optimal delegation

218

Optimal delegation with persistent output shocks

220

Optimal delegation when ther is employment persistence

222

International policy coordination

227

Commitment and cooperation

227

Output directly dependent on the real exchange rate

230

Exchange rate pegs with symmetric supply shocks

232

Exchange rate pegs with asymmetric supply shocks

234

Endogenous exchange rate pegs

236

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