The traditional approach to modeling political parties' behavior, based upon the contribution of Anthony Downs (1957), assumes that the parties' unique objective is to win elections: thus, they maximize their popularity. The crucial implication of this assumption for a two-party system is that if the two parties have the same information about voters' preferences, full convergence of policies results from electoral competition. This is the crucial implication of the median voter theorem. ' More generally, it may be argued that different parties are differently because they represent different constituencies. Parties may not care only about winning elections per se, but also about the quality of the policies resulting from an election. In this case the candidates of the two parties view winning an election not only as a goal per se, but also as a means of implementing a better policy for their respective constituencies. This paper shows that electoral competitions imply dynamic inconsistency if the voters are modeled as rational and forwardlooking agents and parties do not care exclusively about being elected, but also about which policy to implement, once elected. The dynamic inconsistency arises as follows: the parties have an incentive to announce convergent platforms to increase their chances of election. However, if the elected party is not committed to its electoral platform, it has an incentive to follow its most preferred policy rather than the policy announced in its platform. If voters are rational, they account for this incentive. Thus, in general, in a one-shot electoral game the only timeconsistent equilibrium is one in which no convergence is possible, the two parties follow their most preferred policies, and the voters rationally expect this outcome. Full convergence of parties' platforms results only as a limiting case when the parties are completely indifferent with respect to the quality of the policies resulting from the election. Thus, these results differ from the existing literature on ideologically motivated politicians (for instance, Donald Wittman, 1977, 1983; Randall Calvert, 1985), which implicitly assumes the possibility of binding commitments to electoral platforms. Complete or partial policy convergence can be the outcome of political competition if the interaction between the parties and the voters is modeled as an infinitely repeated game. In fact, if the candidates have concave objective functions, the welfare-maximizing policy rule implies a complete convergence of parties' policies. However, this cooperative, and agreed-upon policy, may or may not be sustainable as a subgame-perfect equilibrium depending on parameter values; in particular it depends on the discount rates of the two parties, the degree of polarization of their preferences, and the relative popu*Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213, and National Bureau of Economic Research, Cambridge MA, 02138. This paper is based upon a chapter of my unpublished doctoral dissertation at Harvard University. I am greatly indebted to Jeffrey Sachs for directing my attention toward these issues and for many conversations. I also wish to thank Andrew Abel, Dilip Abreu, Olivier Blanchard, Ramon Caminal, Andrew Caplin, Alex Cukierman, Morris Fiorina, Benjamin Friedman, Herschel Grossman, Howard Rosenthal, and the referees for very useful comments. The responsibilitv. Af anv n mtnkieis Af cAlrirp nfnlv mine The result of policy convergence in a two-party system is more general than the median voter theorem. For discussions of convergence results not at the median, see John Ledyard, 1984; Peter Coughlin, 1984; Coughlin and Shmuel Nitzan, 1981; Melvin Hinich, 1977. For earlier work on spatial competition see Richard McKelvey, 1975; Hinich, Ledyard, and Peter Ordeshook, 1972, 1973, and the references quoted therein. The present paper focuses on the result of convergence rather than on the median voter theorem per se.

A widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates.' A more debated question is whether one has to pay for this good outcome with more real instability. In his seminal contribution, Kenneth Rogoff (1985) suggests that an independent and inflation-averse central bank reduces average inflation but, as a result, increases output variability; the conservative central banker reduces the inflation bias, due to the time-inconsistency problem, but stabilizes less. However, Alesina and Summers (1993) do not find that, at least within the OECD countries, more independent central banks are associated with more variability of growth or unemployment. Thus, they conclude that independent central banks bring about low inflation at no apparent real costs. The point of this paper is to provide theoretical underpinnings to this finding, which is in contrast to Rogoff (1985).2 The basic idea is that one can isolate two sources of output variability. One is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize, for instance, money demand shocks or supply shocks. The second source of variability is or, more generally, policy-induced. This is the variability introduced in the system by the uncertainty about the future course of policy. For instance, Alesina (1987) studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment. An inflation-averse, independent central banker does not stabilize as much the economic variability, in order to keep inflation low and stable. This is Rogoff's point. However, by insulating monetary policy from political pressures, an independent central bank can reduce the variability. The overall effect of independence on output variability is, thus, ambiguous. This result is consistent, at least prima facie, with the evidence in Alesina and Summers (1993) on the lack of correlation between centralbank independence and output variability. In fact, it is possible that when the politically induced output variability is predominant, a more independent central bank reduces average inflation and the variance of output.

Using new cross-country survey and experimental data, we investigate how beliefs about intergenerational mobility affect preferences for redistribution in France, Italy, Sweden, the United Kingdom, and the United States. Americans are more optimistic than Europeans about social mobility. Our randomized treatment shows pessimistic information about mobility and increases support for redistribution, mostly for “equality of opportunity” policies. We find strong political polarization. Left-wing respondents are more pessimistic about mobility: their preferences for redistribution are correlated with their mobility perceptions; and they support more redistribution after seeing pessimistic information. None of this is true for right-wing respondents, possibly because they see the government as a “problem” and not as the “solution.”

The critical economic policy issue for many OECD countries, developing countries, and transition economies currently is fiscal consolidation, and the maintenance of long-run fiscal balance. Two related components underlie this general goal. First, several countries face the issue of deficit reduction, particularly those countries with high debt/GDP ratios. Second, it is becoming increasingly apparent that major reforms of the welfare system and, specifically, of social-security systems are critical ingredients of a long-lasting fiscal consolidation (see Alesina and Perotti, 1995a). In the case of monetary policy, a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions. Relatively few economists dispute the benefits of a certain amount of central-bank independence, even though different commentators and policymakers may disagree on the optimal degree of independence. Also a contracting approach has highlighted the benefit of inflation-targeting and of certain institutional relationships ( contracts) between the executive and the central bank. A similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning. In this paper we ask the following two questions: (i) Do budget procedures matter for the determination of the budget balance and its composition? (ii) Are there certain institutional reforms that one should feel comfortable in recommending? Based on the relatively scarce empirical evidence available, we tentatively answer yes to the first question: budget procedures matter. On the second question we suggest that the two critical areas of reform are: first, more transparency; second, a strengthening of the roles of the executive branch vis 'a vis the legislature, and of the treasury minister vis a vis the rest of the executive branch, in order to achieve a centralized and top-bottom approach to the budget process.

We study how people change their behavior after being made aware of bias. Teachers in Italian schools give lower grades to immigrant students relative to natives of comparable ability. In two experiments, we reveal to teachers their own stereotypes, measured by an Implicit Association Test (IAT). In the first, we find that learning one’s IAT before assigning grades reduces the native-immigrant grade gap. In the second, IAT disclosure and generic debiasing have similar average effects, but there is heterogeneity: teachers with stronger negative stereotypes do not respond to generic debiasing but change their behavior when informed about their own IAT.

In a world of trade restrictions, large countries enjoy economic benefits, because political boundaries determine the size of the market. Under free trade and global markets even relatively small cultural, linguistic or ethnic groups can benefit from forming small, homogeneous political jurisdictions. This paper provides a formal model of the relationship between openness and the equilibrium number and size of countries, and successfully tests two implications of the model. Firstly, the economic benefits of country size are mediated by the degree of openness to trade. Secondly, the history of nation-state creations and secessions is influenced by the trade regime.