Finite horizons, political economy, and growth

This paper analyzes the political economy of growth when agents and the gov ernment have finite horizons and equilibrium growth is inefficient. A "repr esentative" government (i.e., one whose preferences reflect those of its co nstituents) endowed merely with the ability to tax and transfer can improve somewhat on the market allocation, but cannot achieve first-best growth. E fficiency requires in addition the ability to bind future governments. We a rgue that this ability is related to political stability, and we provide em pirical evidence that stability and growth-related policies (namely educati on) are meaningfully related. (C) 2001 Academic Press.