Markov Equilibrium in Models of Dynamic Endogenous Political Institutions

This paper examines existence of Markov equilibria in a class of dynamic political games (or DPGs). DPGs are infinite horizon games in which political institutions are endogenously determined each period. Specifically, at each date t, a social choice rule determines both the current public policy and the social choice rule to be used in date t + 1. These rules are instrumental choices in the sense that they do not affect payoffs or technology directly. We show that any dynamic political game can be transformed into a stochastic game in which the political institutions are reinterpreted as “public players” in a noncooperative, stochastic game played against private citizens. The public players’ preferences may be dynamically inconsistent due to the fact that naturally occurring changes in the economic state, such as evolution of the wealth distribution, alter the way a political institution aggregates preferences of the citizenry over time. The paper characterizes this transformation, and establishes existence of Markov equilibria in which the Markov strategies are smooth functions of the state. Applicability of the result is demonstrated in an example with endogenous voting rules. JEL Codes: C73, D72, D74