Time Consistency and Dynamic Democracy

Abstract

This paper analyses how democratic institutions can help mitigate time inconsistency problems. We illustrate the ideas in a simple model of capital taxation. Voters delegate policy decisions to a politician and employ a retrospective voting rule to hold the elected politician accountable for his policy actions while in office. We show that non-expropriating tax policies can be sustained in Markov Perfect Equilibrium. If voters elect politicians that care enough about power or if they are willing to pay politicians a sufficiently high wage, capital is not expropriated at all in equilibrium.

Keywords: Performance voting, capital taxation, time consistency

JEL Classification: H21, D72