9414253 Krusell One of the implications from the recent literature on economic growth is that economic policy, and particularly taxes which affect the accumulation of physical and human capital, may have important effects on economic growth and welfare. The new literature on political economy offers a theory of how policies are chosen in which the interaction between politics and economics is brought to the fore and used to address a series of questions regarding the interaction between economics and policy choice. More specifically, this project addresses four aspects of the political economy of growth: (1) how politico-economic institutions explain time series data on the income and wealth distributions, capital accumulation, and tax rates; (2) the political economy of the economic and political transition taking place in Eastern Europe; (3) the effects of political uncertainty on economic growth; and (4) the development of new conceptual and computational tools for politico-economic equilibrium theory. This research could make important contributions to our understanding of economic transition and transitional politics in the former socialist countries. This project develops a dynamic model that formalizes the important properties of economic and political transitions. Preliminary results suggest that a simple move to democracy will, besides creating an initial recession, lead to relatively poor long-run performance due to the dynamics of policy determination. Under what conditions will vested interests against rapid economic expansion build up and persist over time and across generations? The research focuses on the political economy of adoption of new production techniques and costly investment in human capital.
