Essays in political economy and macroeconomics

Abstract

In this thesis I develop two models that bring together macroeconomics and political institutions; these models allow me to draw conclusions about the impact of institutions on economic outcomes, and about the effect of economics on political results. In the first essay, I provide a formal theory that explains the effect of government coalitions on the probability of sovereign default, and the seemingly excessive prevalence of surplus coalitions across the democratic world. In the second essay, I construct a model of an endowment economy in which a leader distributes income, and I show how investments in de facto power enable the leader to significantly increase his tenure in office, while collecting a large share of rents for his private benefit. Throughout the thesis it is assumed that leaders are selfish, and institutions (incentives) are the main determinant of their behavior in power.