Irreversible Investments, Dynamic Inconsistency and Policy Convergence

26 Pages Posted: 15 Feb 2007

See all articles by Rune Jansen Hagen

Rune Jansen Hagen

University of Bergen

Gaute Torsvik

University of Bergen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: February 2007

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.

Keywords: capital mobility, dynamic inconsistency, political competition, policy convergence

JEL Classification: E61, F21, H24, P16

Suggested Citation

Hagen, Rune Jansen and Torsvik, Gaute, Irreversible Investments, Dynamic Inconsistency and Policy Convergence (February 2007). CESifo Working Paper Series No. 1910. Available at SSRN: https://ssrn.com/abstract=963322

Rune Jansen Hagen

University of Bergen ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway
+4755589219 (Phone)

HOME PAGE: http://www.econ.uib.no/ansatte.asp?ansatt=729&kategori=263

Gaute Torsvik (Contact Author)

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway
55589225 (Phone)
55589210 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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