¸˛We would like to thank Karel Mertens and Efraim Sadka for useful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following “Faustian trade off”: if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot un-couple the direct effect of his policy from its indirect effect on future power. A Policy-endogenous (PE) equilibrium describes this endogenous transfer of power, and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one’s policy choice did not affect one’s political fortunes. However, the reformation effect induces “more aggressive ” policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics — political power that progressively evolves toward more fiscally liberal types of leaders, and cyclical Faustian dynamics — political power that oscillates

The paper analyzes the e¤ect of the generosity of the welfare state on the skill composition of immigrants. We develop a parsimonious model in which the e¤ect of an increase in the generosity (and taxes) of the welfare state on the skill composition of immigrants under free migration is negative. The reason is that welfare state bene…ts attract unskilled migrants because they contribute to tax revenues less than what they gain from bene…ts; and this generosity works to deter skilled immigrants, because they contribute in taxes more than in bene…ts. In sharp contrast, the e¤ect of an increase in the generosity (and taxes) of the welfare state on the skill composition of migrants

The paper analyzes the effect of the welfare state generosity on the skill composition of migrants across free and policy controlled migration regimes. We develop a parsimonious model in which the effect of an increase in the generosity of the welfare state on the skill composition of migrants under free migration is negative. On the other hand, however, the model predicts positive sorting of migrants if migration is controlled by policymakers in the host country. examine this hypothesis using migration data in the EU, separated by their origin into EU and non-EU countries. Such separation conforms to free and policy-controlled migration regimes, respectively. Using

We acknowledge Steve Coate, Zvi Hercowitz and Jose-Victor Rios-Rull for insightful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the

This paper develops a theory of the endogenous formation of a common market in a three–country, two–factor political economy model. In the status quo, Home and Foreign implement non-discriminatory policies towards international factor flows, as to maximize the domestic median voter’s welfare. Each of the two countries simultane-ously holds then a referendum on a Common Market initiative leading to the removal of the pre-existing policies for factor flows occurring between the member countries, while no coordination is imposed on policies vis-à-vis the rest of the world. Several interesting results emerge. In a common market, factors moving between the members are more likely to gain, the bigger is the import demand of one country as compared to the factor supply of the exporting partner. Factors which instead do not relocate are more likely to see their return decrease when flows are big and import demands are inelastic. Importantly, for the common market to emerge as an equilibrium, some factors must continue to experience enhanced protection when the integration process is completed. This result highlights the potential tension between social desirability and political feasibility of the integration process.

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Abstract. We analyse the impact of different immigration policies on human capital investment in a search-theoretic model. This class of models features unem-ployment and underinvestment in human capital. The underinvestment in human capital can be solved by combining immigration policy with appropriate education subsidies. Extending the model with respect to different skill groups allows to analyse the observed bimodal skilled immigration of the USA. 1.