Abstract
Several developing countries have frequently responded to favorable shocks by increasing government spending more than proportionally and by investing in inefficient capital projects. As a result, transitory windfalls have frequently lead to a contemporaneous deterioration of the current account, an increase of the fiscal deficit-to-GDP ratio, and a decline in the quality of investment. Representative agent models cannot rationalize these facts. Tornell and Lane (1998)[Tornell, A., Lane, P., 1998. Voracity and growth. American Economic Review, 1998, forthcoming] rationalize them considering a differential game among several powerful groups. We present the discrete time analog of that model and show that the results are not specific to the continuous time specification.
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