We characterize efficient self‐enforcing divisions of political or economic surplus between two parties that interact repeatedly. The party in power can decide the allocation, and the parties' political strength changes according to a Markov process. We find that the share of the party currently in power depends not only on its current strength but also on whether it had previously been even stronger since it last came to power. We find that the constitutional supermajority requirements that attempt to constrain the use of power can counterproductively create less compromise.

Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement errorconsistent generalized method of moments estimators, we find that most of the stylized facts produced by investment-q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.