Markov Equilibrium in Models of Dynamic Endogenous Political Institutions

Roger Lagunoff, Georgetown University

Abstract

This paper examines existence of Markov equilibria in a class of infinite horizon games in which political institutions are endogenously determined each period. In these dynamic political games (or DPGs) the rules for political aggregation at date t + 1 are decided by the rules at date t, and the resulting institutional choices 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 the game. These players’ preferences are possibly 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.