The last fifteen years have seen an explosion of contributions in the field of political economy. Two new books, Political Economy in Macroeconomics by Allan Drazen and Political Economy: Explaining Economic Policy by Torsten Persson and Guido Tabellini, organize this literature and evaluate what has been learned. Drazen mostly focuses on applications for macroeconomic policy, while Persson and Tabellini focus on the various tools that can be used to analyze the political process, and the institutional details of decision-making.

This paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb. In the model, firms must set their prices in face of aggregate demand shocks. Their payoff depends on the level of aggregate demand, as well as on their own price and their “neighbor's” price. The latter assumption captures local interactions. Despite the fact that the rational expectations equilibrium (REE) is characterized by a simple pricing rule that firms can easily adopt, the economy does not converge to the REE for all parameter values. When the volatility of monetary innovations is low and interactions among firms are high, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks. We discuss the role of the nature of experimentation, and of path dependence driven by interactions, in explaining these results.

This paper develops a model of job creation and job destruction in a growing economy with embodied technical progress, which I use to analyze the political support for employment protection laws such as the ones that are observed in most European countries. In voting in favor of employment protection, incumbent employees trade off lower living standards (because employment protection maintains workers in less productive activities) against longer job duration. The latter is valued because the employed have rents, achieving wages above their alternative value. The gains from, and consequently the political support for, employment protection are larger the lower the rate of creative destruction (i.e., the lower the growth rate) and the larger the employed’s bargaining power. Hence, employment protection is more likely to arise in economies with greater worker bargaining power. Also, workers in older vintages are more in favor of employment protection. Consequently, greater initial protection increases its own support by maintaining a larger fraction of the workforce in older vintages. Finally, if workers can invest ex ante in match‐specific human capital, multiple steady‐state political equilibria may arise, as the outcome of the mutual feedback between employee rents and employment protection.

This article provides theoretical and empirical analyses of a firing costs model with adverse selection. Our theory suggests that, as firing costs increase, firms increasingly prefer hiring employed workers, who are less likely to be lemons. Estimates of re‐employment probabilities from the National Longitudinal Survey of Youth support this prediction. Unjust‐dismissal provisions in U.S. states reduce the re‐employment probabilities of unemployed workers relative to employed workers. Consistent with a lemons story, the relative effects of unjust‐dismissal provisions on the unemployed are generally smaller for union workers and those who lost their previous jobs due to the end of a contract.