Adjustments in Different Government Systems

Abstract

This paper develops a model in which agents have a conflict of interest over what instrument to use for policy adjustment in response to shocks. Three different government systems are analyzed: cabinet systems, in which one decision-maker has full control over adjustment policies; consensus systems, in which adjustment policies must be agreed upon by all agents; and checks-and-balances systems, in which one agent decides what instrument should be used for adjustment, but the remaining agents may veto its use. All three systems may lead to inefficient policies. The cabinet system adjusts too often. The other systems may fail to adjust when adjustment is optimal. The relative performance of the three systems depends on the degree of political fragmentation and the size distribution of shocks.