DP4275 Ex Post Inefficiency in a Political Agency Model

Author(s): Georges Casamatta, Caroline De Paoli
Publication Date: February 2004
Keyword(s): commitment, dynamic electoral competition, ratchet effect
JEL(s): D72, D82, H41
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4275

We extend the model of Schultz (1996) to a dynamic setting with no policy commitment. Two parties that compete for election must choose the level of provision of a public good as well as the tax payment needed to finance it. The cost of producing the good may be high or low and this information is not known to the voters. We show that there exists an equilibrium in which the party that does not want much of the public good use the inefficient (high cost) technology even though the efficient one is available. Using the low cost technology would, by informing the voters about the cost parameter, force it to produce an excessively high level of the good. Interestingly, this equilibrium is not symmetric, suggesting that a party with a strong taste for the public good is less likely to adopt a wasteful policy.