M2 Master in Economics

Political Economy. Homework, due Feb 5th

References

• Regulation and Distrust. by Aghion et al, QJE, 2010

• Kleptocracy and Divide-and-Rule: A Model of Personal Rule by Acemoglu

et al, JEEA, 2004

• The Rise of Identity Politics, by Besley and Persson, 2019, mimeo

Exercise 1

Read the model by Aghion et al (2010) and consider the following small
variation. Assume that when an individual becomes an entrepreneur, he or
she can produce an additional y units of the numeraire good if he or she is
uncivic, and y −  if he or she is civic. Discuss whether this assumption is
more or less reasonable than the one in the paper. Compute the equilibria
with this assumption and discuss if the new results are coherent with the
regressions in Tables I and II.

Exercise 2

Read the divide-and-rule model discussed in Acemoglu’s lectures notes

(page 195, skip the extension with inequality p. 206). Study exactly the
same model, but consider a two-period version. As they do, focus on Markov
strategies in which strategies do not depend on past history, but only on the
state variable (whether there is a democracy or an autocracy).1 Compute
the solution in both periods and briefly discuss whether the model captures
well politics in an autocratic state.

Exercise 3

In Besley and Persson (2019), there are two groups of voters: the rich and
the poor. One party (R) represents the rich group and the other party (L)
1
In a model with finite horizon, however, Markov strategies do not have to be stationary
(i.e., they might depend on time): e.g., in the final period, the proposal might be different
than in the first period, even if the state variable is the same

1
represents the poor group. In both groups there are some nationalist (anti-
immigration) individuals, who may decide to change party affiliation. The
two parties are run by cosmopolitan (pro-immigration) leaders. The authors
find conditions under which the two party leaders choose anti-immigration
policies (Proposition 1 and Corollary). Instead of looking at the Nash equi-
librium, consider a Stackelberg game, where L is the first mover. Assume
that party L is committed to favor redistribution and pro-migration policies
(x = 1).

(i) Compute the best-response of party R and find out when party R
panders to the nationalist. See if the results are qualitatively similar to
those in Proposition 1. Feel free to make specific assumptions on utilities
and shocks in order to obtain tractable solutions.

(ii) Do you think that the model captures well the rise of nationalism and
populism? Answer this question by referring to other papers on the same top-
ic and/or by presenting data you have gathered from different media sources.
I encourage you to read David Shor’s (a data-scientist, not an academic) nice
interview, especially on p. 4 after “The story that makes the most sense to
me goes like this: In the postwar era, college-educated professionals ...”