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  • Ceyhun Elgin (a1)


I develop a dynamic political economy model with an informal sector and two political parties alternating in office. In equilibrium, if the incumbent political party faces a higher probability of staying in office, it sets a higher tax rate on the formal economy to invest more in productive public capital, while spending less for current office rent. Moreover, I argue that public capital is mainly utilized by the formal sector, and this implies that countries in which incumbent parties are more likely to stay in power have a higher tax burden but a smaller informal sector. I also present some empirical evidence that supports the main results of the model.


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Address correspondence to: Ceyhun Elgin, Department of Economics, Bogazici University, Natuk Birkan Hall, Bebek 34342, Istanbul, Turkey; e-mail:


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