Abstract: How do different development policies come to exist across countries and over time? To address this question, this article develops a politico-economy theory of dynamic Ramsey policies. I adapt the workhorse macro model with heterogeneous agents to include: i) repeated elections, ii) endogenous credit constraints, and iii) occupational choice. Policies and inequality are jointly determined over time as a result of the political process. I characterize the transition dynamics of the equilibrium policy as a function of countries’ initial wealth distribution. The different policy dynamics provide a political rationale for the differences in development policies pursued by developing and developed countries.
Diego Huerta
PhD Student in Economics
I’m a fourth-year economics Ph.D. candidate at Northwestern University. My research is at the intersection of macroeconomics and political economy. In my work, I employ heterogeneous agent models to understand the joint determination of inequality, policies, and economic outcomes.