Abstract
Institutions with checks and balances (e.g., supermajority requirements, bicameralism, constitutional courts) are often celebrated for their effect on the stability and predictability of policies, which is desirable for economic prosperity. However, checks and balances may also prevent governments from adapting policies to a changing environment. An ideal political system should balance these competing concerns.
To analyze the determinants of this trade-off, we build a parsimonious model of dynamic policy-making in which policy makers' preferences are subject to shocks, but policy change is inherently costly. Institutions are defined broadly as a mapping from current policies and power arrangement into future power arrangement. We show that the impact of institutions on policy change is exacerbated by the strategic response of the policy makers to the institution, which makes the comparison across institutions non-trivial. We characterize the optimal institution as a function of the primitives. Political turn-over make policies more unstable, but also makes policy makers vote in a more congruent way. Conversely, checks and balances make policies more unstable, but also make policy makers vote in a more polarized way. Checks and balances remain optimal when the policy makers' ideologies are sufficiently polarized.
Read the presentation here [pdf]
Host: Bård Harstad