Dynamic Stability and Reform of Political Institutions

Abstract

When are political institutions stable? When do they tend toward reform? This paper examines a model of dynamic, endogenous institutional change. We introduce the class of dynamic political games (DPGs), dynamic games in which the political aggregation rules used at date t+1 are chosen by the rules at date t, and the resulting institutional choices do not affect payoffs or technology directly. A political rule is stable if it selects itself for use in the following period. A reform occurs when an alternative rule is selected. Absent an essential private sector, it is shown that institutional reform occurs if and only if the current political rule is dynamically inconsistent. Roughly, a rule is dynamically consistent if it is rationalized by a time separable, state invariant social welfare criterion. Simple majority rules are usually dynamically consistent. However, wealth-weighted voting rules are not. More generally, we identify sufficient conditions for stability and reform in terms of recursive self-selection constraints that treat the rules themselves as players who can strategically delegate future policymaking authority to different institutional types. These ideas are illustrated in a parametric model of dynamic public goods provision.