1 Post - electoral politics

In the literature surveyed so far (except for the common agency approach to lob-
bying models), the basic assumption is that politicians can commit to electoral
platforms; once elected, they just implement their electoral promises. Hence,
the analyis needs no go further than in determining these platforms. But how
can politicians commit and why should they commit? There are no legally bind-
ing mechanisms in place to enforce electoral promises and indeed the essence of
government sovereignity is the ability to change existing legislations, that makes
it even more dicult for politicians to write binding contrats with the electorate.
But this implies that once elected, if there are no future concerns, politicians
would not have incentives to keep their promises. Whenever they have personal
objectives (being them accumulating rents or implementing a preferred policy),
they would just pursue them. But then the voter, as a rational agent, should
be able to anticipate this behaviour and not believe in politicians electoral
promises. Rather, whatever the politician says before the elections, she would
know that the elected politician will only implement his preferred policy and
vote on the basis of this premise (e.g. choosing the politician that in serving his
own interests gets closer to serve hers).
This basic observation has brought two distinct developments in the litera-
ture, the citizen candidate framework, and the agenda model of politics.
For the rst, since without commitment the politician can just pursue his
objectives, the obvious question that arises is which are these objectives. In turn,
this has also led to ask "who" are the politicians, questioning the traditional
assumption that the set of candidates (parties) and their preferences (being them
oce-concerned as in Downs or "partisan" as in Hibbs) are given exogenously
(as in the Downsian framework). In the citizen candidate framework, politicians
are just common citizens who decide to engage in politics, and then the relevant
question concerns how the process of endogenous self-selection in politics takes
place. In extentions, this has led to ask how the dierent electoral systems select
dierent politicians, how the quality of politicians is aected by institutional
features such as the remuneration of politicians, their career in politics or ex
post in the private sector and so on.
1.1 The citizen candidate framework
The two seminal papers here are Besley and Coate (1997) and Osborne & Slivin-
sky (1996). The two papers are basically indentical, except that the former con-
siders strategic voters, while voters are only sincere in the latter. Furthermore,
BC content themselves in deriving and characterizing the possible equilibria,
while OS, thank to their simpler assumption on voters behaviour, can also ask
more substantive issues, such as the dierence in policy proposals and endoge-
nous candidacy between dierent electoral systems (single ballot versus dual
ballot or runo) in their context. We follow the example in Merlo (2007), with
some extentions.
1
There is a large but nite set of voters, indexed by i = 1, ... They have
to select, via majoritarian vote, a representative that selects a policy j in the
unidimensional space 1 = [1, 1]. There is no commitment.
The utility of citizen i, l
I
(j, .), is
(1) l
I
(j, .) = . (j j
I
)
2
where . is a numeraire and j
I
is i
0
s most preferred policy. The distribution
of ideal points in the citizenry is common knowledge and uniform in the support
[1, 1] .
There are two stages, and entry stage and then an election stage. At the
rst stage, citizens simultaneously and independently decide whether to become
a candidate or no. Running at the elections entails a cost C 0 while winning
entails a benet 1 _ 0. Note that 1 are oce related benets beyond those
derived by the fact that the winner directly chooses his preferred policy. After
the entry decision, each candidates ideal point is observed by each citizen.
Since commitment is not possible, once elected, a candidate just implements his
preferred policy.
At the electorate stage, all citizens simultaneously and independently vote for
one of the candidates. The candidate that gains plurality wins and implements
his preferred policy. In the event of a tie, one of the winning candidates is
selected with equal probability to become the policy-maker. If nobody runs,
everybody gets 1. Preferences are as follows:
If i runs and wins, l
I
(.) = 1 C.
If i runs and , wins, l
I
(.) = (j

j
I
)
2
C.
If i does not run and , wins,l
I
(.) = (j

j
I
)
2
.
The notion of equilibrium is Nash; at the entry stage, each citizen candi-
dates correctly predict the electoral outcomes, given the entry decisions of the
other candidates. An equilibrium is a conguration of candidates and expected
electoral outcomes such that no one wants to enter or leave the electoral race.
The model typically admits multiple equilibria (in both pure and mixed
strategies), depending on value of parameters and assumptions on voters be-
haviour. Suppose rst that voters vote sincereously, as in OS.
Then, each voter would just vote for the candidate whose bliss point is closer
to hers. (In case / candidates, / _ 2, run on the same bliss point j, each one of
the / candidates gets
1
|
of the votes of the citizens whose bliss points is closer
to j than to the bliss points of any other candidate.). We make the following
observations.
T.1. Suppose 1 C _ 1. Then there is no equilibrium where no one is a
candidate.
If nobody enters, each gets 1; so for 1 C _ 1 everybody would have
an incentive to deviate and enter the game.
T.2 An equilibrium with a single candidate running uncontested always ex-
ists; for 1 C this candidate can only be the median voter.
Suppose candidate j has entered the electoral stage alone; if the median voter
does not enter his utility is l
n
(.) = (j

)
2
; if he enters, since he then wins for
sure, is 1 C.
2
This is an equilibrium because no one could unilaterally deviate, enters and
beats the median. (And an equilibrium with candidate j is an equilibrium if
the median does not enter, because if the median does not nd it convenient
to enter when the candidate is j, no one else would). If 1 < C the single
candidate equilibrium can be dierent from the median, but not too "far" from
the median, with the distance that falls the larger is 1 C; as 1 C _ 1,
the median would always enter if the candidate was extreme (i.e. with j

close
to +()1).
Single candidate elections not very interesting, rarely the case, usually elec-
tions are contested. Then look for multi candidates equilibria. Which conditions
support a 2 candidate equilibria?
Note rst that, since running is costly, a citizen would not enter the race un-
less he has some positive probability to win. In any two candidates equilibrium,
this immediately implies that 1) each candidate must have
1
2
probability of win-
ning and hence 2) the ideal points of the two candidates must be symmetric
around the median (in our case, 0). That is, the equilibrium policy proposals
must take the form (j

, j

) .
To determine these proposals, that are two forces to consider. First, the
two proposals must be suciently apart to justify the cost of running by each
candidate (or he would prefer not to run). The expected utility of a candidate
with ideal point j

when she runs against a candidate with ideal point j

is
1
2
(1 C) +
1
2
((j

(j

))
2
C) = 2 (j

)
2
+
1
2
C
while her expected utility if she does not run is
((j

(j

))
2
= 4 (j

)
2
Hence, he will only run if 2 (j

)
2
_ C
1
2
or if j

_
q
c
2

1
4
. Of course
if C
1
2
< 0, this constraint is not binding, while if C
1
2
1, there is
no couple of proposals that would support them as an equibrium. So assume
1 C
1
2
0.
Second, the two proposals must not be so apart to make it protable for any
another candidate to enter and win the race. This can only be the median voter
candidate. (A citizen with ideal point outside the interval (j

, j

) would never
nd convenient to enter the race and if a candidate with ideal point insider the
interval (j

, j

) had an incentive to enter, than the median voter too would

have an even better incentive to enter, so that if we rule out the possibility that
the median voter wishes to run than no other citizens would enter the race). If
the median voter enters the race and wins his payo is 1 C. If he does not
enter the race, his payos is

1
2
(j

)
2

1
2
(j

)
2
= (j

)
2
so that if
C 1 < (j

)
2
he wants to enter if he wins. But at the two candidate
equilibria, (j

)
2
_
c
2

1
4
. So if
c
2

1
4
C 1, e.g. if
3
4
1
c
2
0 the median
3
voter certainly wants to enter if he can win. To avoid entrance by the median,
the equilibrium proposals (j

, j

) must not be so apart to let the median voter

win. At (j

, j

) , if the median voter enters, his expected votes are

1
2
(

2
) +
1
2
(
(

)
2
) =

2
while the expected votes of each of his two opponents are
1
2
(1 j

2
) =
1
2

4
so for the median voter not to enter,

2
<
1
2

4
j

<
2
3
.
Summing up,
T.3. Assume
3
2
1 C
1
2
. Then there exists a two candidate equilibrium,
where the proposals are (j

, j

) and
q
c
2

1
4
_ j

_
2
3
.
(the equilibrium is unique i C =
1
2
+
8
9
). Notice that in the citizen-candidate
framework, an equilibrium with two running candidates necessarily involves di-
vergence of equilibrium proposals, contrary to the Downs-median voter theorem
competitition model. Inside the parameter conguration above, the equilibrium
policy proposals will be the closer, the higher are the cost of running and the
smaller are the benets to hold the post.
In general (not in this case), in citizen-candidate models under plurality there
are also equilibria with more than two candidates. In many of these multiple
candidate equilibria, for some parameters conguration (e.g. restrictions on
1 and C and on the distribution of ideal points), some candidates are just
"spoilers"; they enter the game even if they have no possibility of winning, and
their entrance is substained by the fact that if they withdrew from the race, a
candidate with a far bliss point from the spoiler would win, so inducing a loss
to the spoiler larger than the entrance cost.
OS however show that for a large set of parameters, under plurality rule,
there are only two candidates running. For the runo system, it is instead more
likely that there are more than two candidates running (the subset of parame-
ters that supports a two candidates equilibrium under the runo is a proper
subset of the subset of parameters that supports a two candidates equilibrium
under plurality). For instance, under plurality rule it is never the case than
two candidates will run on the same policy position, while this is possible under
runo (as one of the two may still pass the turn, runs again at the second turn
and wins). On the contrary, in a three candidates equilibrium, under the runo,
dierently from plurality rule, there cannot be "spoilers"; i.e. each candidate
under the runo must have a positive probability of winning. This is so be-
cause, under the runo, the position of a candidate at the rst turn does not
aect the identity of the winner at the second turn. Finally, in a two candidate
equilibrium under the runo the dispertion of candidate position is lower than
under plurality. The intuition is that a centrist candidate can more easily win
at the second turn, if he manages to pass the rst turn, as he then attracts all
the votes of the more extreme candidate who did not pass the turn. This means
4
that the conditions to avoid entrance of a centrist candidate (e.g. the median
voter) are more restrictive under the runo; hence, the equilbrium position of
the two candidates must be closer under the runo. Contrast these results with
Bordignon & als. below.
Hence, the OS version produces results that are in line with Duvergers law.
It is more likely to have only two candidates running under plurality rule than
under the alternative electoral system (runo).
Strategic voters. With strategic voters, typically the set of possible equilibria
(in pure and mixed strategies) increases. In the model above, however, with two
candidates and plurality rule, the eect of strategic voters is just to increase
the set of substainable policy proposals. For
3
2
1 C
1
2
, the equilibrium
proposals are still (j

, j

) but with
q
c
2

1
4
_ j

_ 1. The intuition is
as follows. The lower boundary must still be satised as it does not depend
on strategic voting. With only two candidates, strategic voters however vote
sincerously (for the candidate that is closer to their bliss point), and j

_
q
c
2

1
4
is needed for each candidate to be willing to run. To dene the new
upper boundary with strategic voters we have to consider the out-of-equilibrium
responce of voters to the entrance of a new candidate. Suppose j

_
2
3
and
consider the reaction of a voter i with bliss point close to 0 to the entrance
of the median voter into the race. Suppose voter i expects all other voters to
maintain their voting strategy unchanged after the entry of the median voter.
Then if i switches his support in favor of the median voter, the median voter
would not win, and the only consequence would be that the candidate closer to i,
who before won with probability
1
2
, now loses for sure. Hence, under these out of
equilibrium beliefs, switching is a weakly dominated strategy for any i (weakly,
because the citizens with bliss point equal to zero are indierent between voting
for the median voter or for any of the two candidates). Repeating the argument,
this implies that any 1 _ j

_
2
3
can now be substained as an equilibrium with
strategic voters.
1.2 The role of parties; Levys model
The citizen-candidate model has many possible applications, because it intro-
duces the possibility of endogenous entry into the model and "solves" the com-
mitment problem nicely (see for instance Besley and Coate (2001, Jpub econ)
on scal federalism, Besley and Coate (.) and Felli and Merlo (.) on lobby-
ing, Morrelli (2004) on endogenous candidacy etc.). But as a matter of fact,
there are few cases where candidates enter autonomously in the policy arena.
Generally, there are pre-esisting parties, and willing candidates need to nd the
support of these pre-esisting parties to compete; in most cases, candidates are
directly selected by the parties. In a sense, given the plurality of equilibria that
emerge in a citizen-candidate framework, parties and other institutional char-
acteristics of the political landscape are needed in order to select among all the
possible equilibria, as hinted by Besley and Coate (1997). (Diermeier and alts.
5
(EMET, 2003 AER, 2005) and Diermeier and Merlo (2004, Jpubec) study dif-
ferent models of candidates-parties interation, with empirical application to the
US congressional system. See also Mattozzi & Merlo, 2005). But what are "po-
litical parties"? Which is their role in the political arena? Surprisingly enough,
very little work in political economics is dedicated to address this fundamental
question. An interesting idea (also exploited in Morelli and Bordignon & alts)
explored in Levy (2004) is that parties allow candidates to credibly commit
on policy platforms before elections. Dierent citizen-candidates, representing
groups with dierent interests in society (social cleavages), "meet" before elec-
tions, discuss about policy platforms, and through open congresses nd a way
to commit to a common platform, that then becomes credible to the eyes of
the electorate because parties typically have ways to impose discipline to their
members (e.g closed lists). Indeed, in spite of the theoretical argument at the
basis of this lecture, empirical research suggests that a large number of electoral
promises are in fact kept by politicians (in the UK and Canada in the years
1954-1979 between 60 to 70% of electoral promises were fullled by winning
parties: Budge et als, 1987). An interesting consequence of Levys model is
that the commitment function of parties reduce the multidimensionality of pol-
icy issues, so producing a theoretical explanation for the empirical evidence that
policy is largely unidimensional (Poole & Rosenthal, 1997 and the NOMINATE
index). So parties matter, and matter precisely because they are able to reduce
the multidimensionality of policy space.
1.2.1 Model
(Very simplyed version). There are 3 potential candidates , = a, /, c each rep-
resenting a dierent group in the society, each with
1
3
of votes. Each candidate
has preferences on a multidimensional policy space y Y R
n
, with y

repre-
senting js bliss point (assumed to be unique) in the policy space. If a candidate
runs alone at the elections (decided by pairwise plurality rule) he can only cred-
ibly propose his bliss point at the elections, y

. If he nds an agreement with

another candidate(s), that is, if he forms a "party" with another candidate, then
the party can credibly oer any proposals in the Pareto set of the candidates.
For instance, party (a, /) can oer any proposals in the set
1
o,b
= (y Y :there is no y
0
s.t. n

(y
0
) _n

(y), , = a, /, with n

(y
0
) n

(y),
some ,).
The model is then solved in two steps. Step 1) for all possible party congu-
ration, nd the pure strategy Nash equilibrium of the platform game and solve
for the policy platform that is implemented at the elections. Step 2), derive
the set of equilibrium party congurations, where a party conguration is an
equilibrium if it is stable ( where stable here means that there are no single
politicians or groups of politicians that prefer to quit the coalition and forms
another stable coalition). (In a companion paper, Levy also experiments with
other notions of stability in cooperative games, still nding support for his basic
conclusions).
6
For simplicity (although model is more general) assume preferences take the
form: n

(y) =
P
n
I=1
( j
I
j

I
)
2
.
Unidimensional policy. Suppose rst that j 1, unidimensional policy
space, with 1 _ j _ 1. Let j
o
= 1, j
b
= 0; j
c
= 1. If all candidates run alone,
candidate / (the median) wins for sure. Allowing the formation of parties in
this case cannot change the result, because intuitively party (a, c) cannot nd
an agreement that beats /
0
s platform. More precisely. There are 5 potential
party coalitions (a, /, c),(a, /), c , a, (/, c), (a), (/), (c) , (a, c), / , where
(i, ,) , / indicates that i, , have formed a coalition and / is not a member of
that coalition. The party (a, /, c) can oer any platform in the space 1 _ j _ 1,
the three parties (a), (/), (c) can only oer the bliss point of each member, with /
winning for sure. In conguration (a, c), / party (a, c) can oer any platform
in [1, 1], but any platform dierent from 0, would be beated by / running
alone. Thus the party (a, c) oers j = 0 too. In (a, /), c , (a, /) can oer any
j [1, 0] thus beating c for sure. Similarly, for a, (/, c). Which congurations
are stable? (a, /), c and a, (/, c) are stable only if (a, /) (resp.(/, c)) oers
the platform j = 0; otherwise, / would prefer to break the party, run alone and
wins at his favorite policy, j = 0. (a, c), / is stable if (a, c) oers the platform
j = 0; neither a nor c can improve their payos by deviating. Finally, (a, /, c)
is stable only if it oers j = 0; otherwise, / would prefer to break the party and
run alone, enforcing his platform.
In this case, with unidimensional policy, then parties do not matter; the out-
come is the same, with or without parties, and coincides with the one preferred
by the median voter, j = 0.
Bidimensional policy. Suppose now that j 1
2
, bidimensional policy space,
with 1 _ j
I
_ 1, i = 1, 2. Let j
o
= (1, 1), j
b
= (1, 1); j
c
= (1, 1). Notice
that now the median voter is c; if all candidates run alone, in pairwise voting,
j
c
beats any other alternative. The possible party congurations are the same
than above. If (a, /) forms a party, this party can oer all policy platforms in the
Pareto set of the two candidates a, /. That is, with the preferences stated above,
the 45
0
line joining their bliss points: 1
o,b
= (j
1
, j
2
) : j
1
= j
2
[1, 1] .
If (a, c) forms a party, 1
o,c
= (j
1
, j
2
) : j
1
= 1, j
2
[1, 1] . Similarly,
1
b,c
= (j
1
, j
2
) : j
1
[1, 1] , j
2
= 1. Finally, 1
o,b,c
= (j
1
, j
2
) : j
1
, j
2
[1, 1] , j
1
_ j
2
.
Draw a picture.
Equilibrium platforms.
(1) Case (a), (/), (c). Each party runs alone proposing his platform; c wins
and j
c
is implemented.
(2) Case (a, /), c . To nd (a, /) equilibrium proposal, ask rst which is the
policy platform belonging to 1
o,b
that would give as voters the same utility
than j
c
(draw a picture). That is, solve:
n
o
(j
1
, j
2
) =(1 j
1
)
2
(1 j
2
)
2
= n
o
(j
c
) =(1 1)
2
= 4
under the constraint that j
1
= j
2
= j, as (a, /) proposals must belong to
1
o,b
.
Sustituting and solving (and recalling that j [1, 1]), j =
_
2 1. Note
that at j
1
= j
2
=
_
2 1,
n
b
(j
1
, j
2
) =n
b
(
_
2 1,
_
2 1)=2(2
_
2)
2
n
b
(j
c
) = 4
7
so that /
0
s voters would certainly support j
1
= j
2
=
_
2 1 over j
c
.
Next, ask which is the policy platform belonging to 1
o,b
that would give /s
voters the same utility than j
c
(draw a picture):
n
b
(j
1
, j
2
) =(1 j)
2
(1 j)
2
= n
o
(j
c
) =(1 1)
2
= 4
solving, j
1
= j
2
= 1
_
2. And note again that n
o
(1
_
2, 1
_
2) n
o
(j
c
).
Thus, at the equilibrium, one of the two politicians in (a, /) runs on the
platform (1
_
2) < j
ob
< (
_
2 1) and wins the context against c. Hence, j
ob
is implemented.
(3) Case (a, c), /) . Any platform in the Pareto set 1
o,c
is preferred by both
voters in groups a and c to j
b
. Hence, a politician in (a, c) runs on the platform
j
1
= 1, j
2
[1, 1] and wins the context against /.Hence, j
oc
is implemented.
(4) Case a, (c, /)) . As case 3 above. One politician in (/, c) runs on the
platform j
1
[1, 1] , j
2
= 1 and wins the context against a.Hence, j
bc
is
implemented.
(5) Case (a, c, /) . Any proposal in the Pareto set of the three groups is
sustainable as an equilibrium. Hence, j
obc
is implemented.
Stable equilibrium party conguration.
(1) Case (a), (/), (c) is stable by denition.
(2) Case (a, /), c is stable. Neither a nor / can earn by leaving the coalition.
(3) Case (a, c), /) is stable only if party (a, c) runs on j
c
, i.e. j
oc
= j
c
;
otherwise, c would be better o by leaving the coalition and running alone.
(4) Case a, (c, /)) is stable only if party (/, c) runs on j
c
; i.e. j
cb
= j
c
;
otherwise, c would be better o by leaving the coalition and running alone.
(5) Case (a, c, /) is stable only if it runs on the platform j = (j
1
= 0, j
2
=
0), otherwise either c leaves the party or a, / leaves the party and form their
own party (which is stable). Note that j = (0, 0) is the party platform in 1
o,b
that max the utility of politician c.
In this example, with two dimensions, parties matter. Without parties, the
only equilibrium is the one desired by the median voter j
c
; with parties, we have
another equilibrium, any policy j (1
_
2,
_
2 1), including therefore j =
(0, 0). With two dimensions, candidates a, / can nd a stable agreement that
beats c. Not only, but as the multidimensional conict is solved inside the party,
the observed conict is unidimensional. In the stable conderation (a, /), c,
voters only have to choose between two parties, one running on j
c
= (1, 1)
and the other running on a j (1
_
2,
_
2 1), say j
ob
= (0, 0). The observed
conict is along the line joining the points j
c
and j
ob
. (Draw a picture).
But is it true that parties matter? Recent empirical evidence suggests they
do. Of course, there has always been empirical evidence of correlations be-
tween implemented policy and the government partys ideological position, for
example, with leftish parties supporting higher taxes and higher expenditure
and rightish parties supporting lower taxes and lower expenditure. But this
could simply be the eect of an oscillation in citizens preferences, with, say,
the random median voter than sometimes chooses one and sometimes the other
8
between two parties with xed policy positions. Hence, it could still be that are
citizens preferences that matter, no parties preferences. To solve this prob-
lem, Petterson-Lindbom (2009,JEEA) compares tax and expenditure policy in
Sweden municipalities where the social democratic party won by a small mar-
gin, with policy in other Sweden municipalities where the opposing party won
by a small margin. As in both cases the margin is small (1-2% of votes), one
can image that citizens preferences were basically the same in the dierent lo-
calities, and the victory of a particular candidate was due to pure chance (in
a sense, that dierent municipalities with the same citizens preferences were
randomly assigned to two dierent "treatments", one involving a left and the
other a right government). This means that if a dierence in policy choices
exists between the two types of municipalities it can only be due to dierence
in parties ideology, not in citizens preferences. Petterson-Lindbom does nd
statistical signicative dierence, with municipalities run by social democratics
taxing and spending more than the others, thus suggesting that party ideology
-and not citizens preferences- matters for policy. (Using the same tecnique, ?,
(QJE, 2010) instead do not nd evidence that at the city level in the US there
is a partisan eect on policy. Possible explanation: higher mobility in the US
than in Sweden, making Tiebout eects more likely).
1.3 Agency model of politics.
In the agenda model of politics, on the contrary, the idea is that elections
themselves may work as a rewarding/punishment mechanism for the policy mak-
ers. Politicians that renege their electoral promises today may be punished by
the electorate tomorrow, at the next elections, so forcing them to keep their
promises. But the story is not so simple. In line with modern contract theory,
this literature also recognises that the contract between the electorate and the
politicians can only be "incomplete" as it cannot specify ex ante all specic
contingiences that may occur after the elections, so that there is a true dele-
gation of responsability to politicians, and the punishment mechanism is not
immediate. Furthermore, politicians may have better information about these
contingiences than voters have (who are better described as "rational ignorant"),
as well as better information on their own quality, thus explicitely introducing
asymmetric information in the picture. Finally, there is another basic dier-
ence between the "political contract" and the ones usually studied in contract
theory (say, between shareholders and managers or employers and employees).
The rewarding-punishment mechanism used in politics is much simpler than the
one that is normally prescribed as optimal in contract theory; politicians are
basicaly either re-elected or defeated, with no alternatives allowed. This makes
the analysis dierent from applications of contract theory to other elds. No-
tions of accountability and responsability of politicians that would be dicult
to address in other models, emerge quite naturally in this framework.
PT dont cover much of this literature. Basic reference: Besley, 2007. Pre-
vious work: Barro (1973), Ferejohn (1986), pure hidden actions model (retro-
9
spective voting, all governments equal), Besley & Pratt (2004), only adverse
selection. PT, both, but with politicians that do not know their type (truly ca-
reer concern models), not very interesting. Most interesting cases: both Besley
& Case (1995a and b), Coate & Morris (JPE 1995), Rogo (1990, RES), Bor-
dignon & Minelli (2001 JpubEC).
1.3.1 Baseline model
Follow Besley, 2007.
Two periods, t = 1, 2 and two states of the world, : = 0, 1. Politicians observe
the state of the world, voters dont, but know the ex-ante probability, say
1
2
, for
each possible state. Politicians take a single action in each period, c
|
0, 1 .
Payos to voters is if c
|
= :
|
, 0 otherwise. Two types of politicians, i = d, c,
"dissonant" and "congruent". Congruent politicians share the same preferences
as voters, and always take the action preferred by voters (e.g. congruent are
not truly strategic; but this assumption has the eect to x out of equilibrium
beliefs, allowing for a much simpler analysis of the model. See Coate and Morris
and Bordignon et Minelli for a detailed analysis where good politicians also
signal, so that renements on out-of-equilibrium beliefs need be invoked to nd
a unique equilibrium). So their utility when in charge is 1 +, where 1 is any
benets for being in oce (ego-rents, wages..). When not in oce their utility
is zero. Dissonant politicians earn 1 too when in oce and zero outside, but
when in oce they also earn a private benet r 0, 1 if they choose c
|
,= :
|
(rents can be everything, even lack of eort, depend on applications). r is drawn
from some distribution with cdf G(r) and average j. Citizens do not know the
type of government but know that the ex-ante probability that a politician is
congruent, .
The sequence of events is as follows. At the beginning of time 1, nature
chooses the realization of :, i, and r
1
. These choices are not observed by voters,
but are observed by politicians (who then know their type, the realization of
the state of the world and the private rents). The incumbent than picks an
action c
1
0, 1. Voters observe their payos and decide if re-electing the
incumbent or re-electing a random opponent whose ex-ante probability of being
congruent is . At the beginning of period 2, nature chooses r
2
. Having observed
this choice, whoever is in charge in the second period chooses again an action
c
2
0, 1 and payos are realized. World ends.
Let c
|
(:, i) be the action taken by type i in period t when the state is :.
All agents discount future at rate 1 , 0. As this is a dynamic model with
asymmetric information, the relevant notion of equilibrium is that of Perfect
Bayesian Equilibrium (PBE). At the equilibrium, 1) each agents strategy is
optimal given the other agents optimal strategies and their "beliefs" (about
the node of the game at which they are); 2) beliefs, whenever possible, are
revised according to Bayes rule.
10
The model is solved by backward induction. At time 2, as there is no future
ahead, all types choose their preferred action, that is c
2
(:, c) = :
2
, c
2
(:, d) =
1 :
2
. At time 1, dissonant politicians may decide to behave as congruents, in
the hope to fool the voters and being re-elected. Let ` be the probability that
dissonant politicians do the right thing for voters at time 1. Given this strategy
by dissonant politicians, if a voter observes that is payo is is the rst period
(hence the right choice has been taken), by Bayesrule her ex post beliefs about
the type of the politician are:
=
t
t+(1t)X
Note that if ` < 1, and the dissonant politician will be elected for
sure if he plays c
|
= :
|
in the rst period. If the voter instead observes that her
payo is 0 in period 1 (as congruent politicians always give them ), = 0
and voters vote for opponent.
Given these strategies for voter, the expected utility of the dissonant politi-
cian is r
1
+ 1 if he takes his favored action in period 1; it is 1 + ,(1 + j) if
he imitates the congruent politician. Clearly, the dissonant politician will take
his favorite option if r
1
,(1 +j) and pool if r
1
_ ,(1 +j) (when indierent
you can assume whatever). Hence, the ex ante probability that the dissonant
politician pool in period 1 is ` = G(,(1 + j)). This is a PBE, as each agents
strategy is optimal given the strategies of any other agents and beliefs are re-
vised (on the equilibrium path) by Bayesrules. At this equilibrium, congruent
politicians always set c = :, dissonant politicians set c = 1 : in period 2 and
c = : in period 1 if r
1
_ ,(1 +j). All politicians who choose c = : at period 1
are re-elected.
Note: ex ante welfare of individuals is
\ = ( + (1 )`) + ,((1 + (1 )(1 `))
Thus, utility in the rst period increases in `, but utility in the second period
decreases in `. This is the double eect of elections; elections increase discipline
in the rst period (because now a percentage of dissonants well behave in the
rst period in the hope of being re-elected) but reduce selection in the second
period (because some dissonant politicians are now re-elected in the second
period). This basic trade-o always appears in this type of model.
1.3.2 Extentions
The basic model can be extended (and has been extended) in several directions.
Here, pick up only some themes (see Besley, 2007 for more extensive treatment).
Term limits
First, model suggests that term limits matter. In those countries where
politicians are subjected to a term limit (US Presidential & Gubernatorial elec-
tions, Italian municipal elections), political behaviour in the nal period should
11
be structurally dierent from the one in the previous periods. Empirical evi-
dence (Besley & Case, AER 1995, Bordignon & als., JUE 2003), suggest that
this is indeed the case. Terms limit are usually a bad idea in this kind of models,
extending the period indenetly may lead to even dissonant politicians always
taking the congruent action (but see Strum, 2008 for an opposite argument,
based on the idea that term limits allow well minded politicians to take unpop-
ular but ecient actions). Generally, with more periods, the disciplining eect
of elections is larger.
Partisan politics
Second, the model can easily be extended to partisan policy and incumbents
advantage. Suppose there are now two parties, , 1 and that a percentage of
voters . are just partisan voters (they vote on the basis of the ideology, not
observed policy) and that
1
2
+ j of the partisan voters prefer party (where
j (<)0). Let party be the incumbent. Assume that as in PT that non-
partisan voters are subject to an idiosincratic shock o
I
, uniformly distributed
on

1
2
,
1
2

and a popularity shock on the incumbent c, uniformly distributed

on
h

1
2
,
1
2
i
. Upon observing the idiosincratic shock, a not partisan voter will
vote for (when he observes the congruent action) if
o
I
+ c + _
Solving for the distribution of o
I
, not partisan voters vote for A (when
observing the congruent action) with probability
1
2
+()+c. Adding the
partisan voters, Party A will then win the election if
(1.)(
1
2
+()+c) +.(
1
2
+j) _ .(
1
2
j) +(1.)(
1
2
()c)
that is, if
.j + (1 .)(() + c) 0
Solving for c, the probability for the incumbent to win the election when he
takes the congruent action j(c) is then:
j(c) =
1
2
+ (0 + ())
where 0 =
.q
(1.)
(implicitly assuming
1
2
_ (0 + ( )) _
1
2
). Clearly
if 0, the incumbents advantage among partisans, is positive and very large
(negative and very large) A can be elected (defeated) for sure whatever he does.
Notice that if j = 0, 0 = 0 and partisan voters are totally ininuent for the
result (they just cancel out).
If the incumbent politician is a dissonant politician and instead chooses the
dissonant action j(d) the probability of winning is
j(d) =
1
2
+ (0 )
Hence, the dissonant politician will choose the congruent policy if
12
(
1
2
+ (0 + ())),(1 + j) _ r
1
+ (
1
2
+ (0 )),(1 + j)
(),(1 + j) _ r
1
so that in equilibrium ` = G((),(1 + j))
An increase in electoral uncertainty (a smaller ) reduces the incentives for
the dissonant politician to follow the congruent policy, i.e. more incumbency
advantage and more uncertainty reduces accountability.
Information & accountability
Third, the model oers an obvious role for information in aecting political
accountability. Go back to the baseline model and suppose that voter now
observes the action of government (her own payo) with probability only, but
also receives an independent signal on the type of incumbent (after the latter has
chosen c but before elections) with probability t. Both signals could be provided
by the independent press. Hence, if in period 1 the dissonant politician chooses
his preferred action, he will be now found out with probability t +(1 t) and
re-elected with probability (1 )(1 t). If instead he chooses the congruent
action, he will be however defeated with probability t. He will then choose the
former if
(1 t),(1 + j) _ r
1
+ (1 )(1 t),(1 + j)
(1 t),(1 + j) _ r
1
so that ` = G((1 t),(1 + j))
Better information about the action (higher ) certainly increases voters
welfare and political accountability. Better information about the type (higher
t) reduces it. As he is found out more often anyhow, the dissonant type is led
to pool less in the rst period; this reduces the disciplining eect of elections,
but increases the selection eect.
Empirical evidence on accountability of politicians and information. Besley
& Burgess (2002 QJE) on India: Indian states in 1958-92 with more newspapers
circulation and higher electoral accontability were more responsive to falls in
food production and crop od damages via public food redistribution and famine
relief programmes. David Stromberg on New Deal (QJE, 2004). Use technology
induced dierences (exogenous variation) in radio diusion across US states to
test if expenditure from a major New Deal relief program (FERA) depended on
radio diusion. Finds that spending was higher were radio diusion was higher
and provide evidence that it was a swing voter eect to produce the dierence
(politicians would be dismissed more easily if they did not provide funds to
these areas). Stromberg and Snyder (2010, JPolEc) use exogenous variation
between electoral districts and local media markets to test if US members of
congress with more local press coverage were more responsive to local issues
(as measured by recorded voting in Congress). Find strong support. Deep and
13
growing interest in economics on the relationship between media and policy. See
Prat & Stromberg (2010, mimeo) for a recent survey.
Other extentions. Endogeneize , the share of congruent individuals who
enter in policy. Consider alternative private market opportunities, and ask if
paying more the politicians induce more or less entry by dissonant individuals
in political arena. The issue here is accountability and political selection.
1.3.3 Applications
Agency models of politics allow many possible applications, all around the ques-
tion about how dierent institutional mechanisms aect accountability of politi-
cians. Some examples follow that show the versability of the model.
Autocracies
Many countries in the world are not democracies; the POLITY index sug-
gests that indeed most are "autocracies", countries where some elements of
what we normally associate to a democratic system (civil and political rigths,
free press, separation of powers, regular elections etc.) are missing entirely, or to
some extent. In these countries, autocrats hold power, often for several decades,
without ever being contested by serious elections (there may even be elections,
but they usually are "fake" ones). Uncontested power may allow autocrats
to expropriate citizens, thus inducing less investment and less growth. Yet, it
is unclear which is the relationship between democracy and economic growth.
Autocracies some time do better than democracies and historically periods of
very fast growth are associated with autocratic governments (i.e. the Indus-
trial Revolution in XVIII Britain). Besley & Kudamatsu (2007) suggest that
what distinguish autocracies from democracies in term of economic develop-
ment is not the average rate of growth, but rather the variance; autocracies are
characterized by a higher variance in economic performance (i.e. GDP growth)
than democracies; they either do much better or much worse than democracies.
Why?
Even in autocracies, issues of selection and accountability of politicians dont
disappear. There are two broad approches in economics to the problem. Ace-
moglu & Robinson (Cambdrige UP, 2005 & several papers), in a historical per-
spective, focus on issues of selection: which "classes" hold power in autocracies
and if this de facto distribution of power is compatible with protection of prop-
erty rights and productive investment. Bruno de Mesquita et als. (Mit press,
2003) focus on the issue of the "accountability" of politicians; whether even
in autocracies, autocrats remain however "accountable" to someone, even if
by denition they are not accountable to total population (as it happens in a
democracy). The idea is that in an autocracy where the power of the leader can
be contested (there exists a "selectorate" that can dismiss the leader), the leader
will be forced to avoid expropriation policies, and invest instead in productive
investments so stimulating economic growth.
Besley & Kudamatsu use the simple model above to discuss this issue. Here
a simplied version, There are two groups in the society, A and B, each of size
,and the autocrat belongs to one of this group, say A. In both of these groups
14
there is a subset of people, say : < , who can dismiss the leader and substitute
him with another leader. As above, there are two periods, t = 1, 2 and two states
of the world, : = 0, 1 and the leader takes an action in each period, c
|
0, 1 .
Payos to citizens is
1
if c
|
= :
|
,
2
otherwise, with
1

2
, and dissonant
leaders may prefer c
|
,= :
|
as they then earn a private benet r. The leader
also decides about a redistribution of across the two groups A and B, and
since the leader belongs to group A (as a private citizen) he always prefers to
give more resources to this group (say, is divided in the proportion /, 1 /,
/
1
2
, and / goes to group A). The selectorate observes in the rst period
and if the leader chooses c
|
,= :
|
, the selectorate (the : people in both A and B)
may decide to substitute him. However, if the selectorate decides to change the
leader a contest for power between group A and group B emerges ( there is a
random "popularity" shock c that may end up with a citizen belonging to group
B being selected as new leader, so that in period 2, / will now be given to group
B). The central result is that the selectorate in group A will decide to change the
leader when this chooses c
|
,= :
|
only if group A is reasonable certain to mantain
power in the ensuing struggle with group B; otherwise, group A may prefer to
stick with the old leader even when this misbehaves in period 1. The conclusion
is that even in an autocracy the leader may be forced to behave in the interest
of the collectivity (c
|
= :
|
) provided that the selectorate is suciently strong
and independent of the leader; otherwise, the leader runs unchecked and chooses
the expropriating strategy c
|
,= :
|
, leading to poor economic performance. In
Besley & Kudamatsu, economic successful autocracies are the ones where the
selectorate is suciently strong to keep in check the leader, and some empirical
evidence is oered to support this claim (in China for instance the selectorate is
the Comunist Party, in others is the Army. They also check if the unexpected
death of a leader led to a change of power or not, using this fact to establish if
the selectorate existed or not.).
Yardstick competition
Suppose that in a region (municipality, country, etc.), politicians may be
good or bad (...competent or incompetent..) with some ex ante probability 0
and that citizens do not observe the type of incumbents. Bad politicians like to
cash some rents (revenues less public good expenditure), good politicians only
like what is best for citizens (zero rents). Also assume that there is some shock,
say a productivity shock - on the production function of public goods, q, that
is observed by the incumbent but not by the citizens. The shock is high - with
probability and low - with probability 1. When the shock is high, the same
q can be produced with less revenue, say with a tax T (for simplicity assume that
governments have to supply a x level of public good, say q

). There are two

periods and an election at the end of the rst period. Citizens do not observe
either the type of the incumbent or the realization of the shock (although they
know the stocastic properties of the economy, that is they know the probability
that the incumbent is good is 0 and the probability that the shock is high is
), but observe the tax chosen by the incumbent in the rst period, T. Because
the shock is not observable, bad politicians in the rst period can pretend that
15
the shock has been low (even if it was high), imposes a higher tax on citizens,
say T , and accumulated some rents in the rst period (r = T T). Citizens
are rational and know the strategies played by bad politicians; however, if it is
suciently likely that the shock has been low, by Bayesrule, by observing T,
the citizens may conclude that the shock was indeed low and that the incumbent
is good, thus re-electing him instead than an opponent.
Suppose now that there is a second region (..country, municipality, state..),
indentical to the rst, whose economy is correlated to the rst, meaning that
a positive (negative) shock in the second economy makes it more likely that a
positive (negative) shock also occured in the rst economy. Also suppose that
politicians in the two regions independently and simultaneously select the tax
rates, having observed the realization of the shock. Then, citizens in the two
regions have now a dierent source of information about the quality of their
incumbent; if they observe T in their region, but T in the other region, they
know that it is more likely that their incumbent is a bad type who is attempting
to fool them, and may vote therefore for the opponent. Technically, the ex post
beliefs of citizen in region i at the end of the rst period, call them j, not only
depend on T
I
, the observed tax in their region, but also on the observed tax
in the other regions, T

, j = j( 0, T
I
, T

, ) In turn, as they know that they

can now be found out more easily when cheating, bad incumbents in the rst
period are now led either to imitate more the good government in the rst period
(selecting T more often when - = -) or give up entirely, selects some favorite
level of taxation in the rst period (say,
b
T, the rents maximizing tax rate) and
accept defeat at the elections.
This is the idea of "Yardstick Competition"; the probability of re-election of
an incumbent should not only depend on his implemented policies, but also on
the policies adopted by "neighboring" jurisdictions, e.g. the ones citizens have
information about and use in order to compare the performance of the dierent
politicians. The model has been rst developed and tested by Besley and Case
(AER, 1995), who show that the probability of re-election of a guvernor in
US states depend on the tax selected in that state and the tax selected in
neighboring states, with guvernors that raise more taxes than neighbors that
are less likely to be re-elected. It has then later applied to Italian (Bordignon et
als., 2003, JUrbEcon), Spanish (Sole Oll ?) and British municipalities (Revelli,
2008, JpubEcon). Revelli does it in a particular clever way ( "neighboring"
jurisdictions are identied exogenously, using local media markets as identied
by the BBC) and also check whether citizens use local tax rates or measures
of eciency in the provision of local services in order to assess the quality of
their politicians, concluding that citizens only use taxes. Bordignon et als (2004,
EcLet) study yardstick competition theory more in details. Bordignon (2010)
argue that tax and yardstick competition, although both a consequence of higher
intergovernmental competition, aect the trade o between the disciplining and
the selection eect of elections in opposite ways, leading to more disciplining
in the case of tax competition and to more selection in the case of yardstick
competition. See also Besley and Smart (2007, Jpubecon) on more general
16
applications of the model to various scal constraints.
Transparency in policy making
Rules in the public sectors are often "atter" than in the private sectors; i.e.
public employees wages depend less on results than wages in the private sector,
transfer mechanism to public agencies or local governments are less incentivat-
ing than theory would suggest etc. Bordignon and Minelli (2001, JpubEcon)
suggest that there is common explanation behind this evidence; atter rules,
although less ecient, may be better that complex rules as they allow for more
transparency in policy, leading to more accountability for politicians. In the
model, there are three agents, the government, the citizen and an agency. The
government tax citizens and use tax revenue to nance the agency than then
supplies a service to citizens. Agency must exercite some eort in provinding
services, and it is more likely that the service will be of high quality if the agency
chooses a higher level of eort. Government can observe the amount of eort
made by the agency; citizens cannot. There are two periods and governments
can be of two types; good governments, who just want to provide the service
to the citizens at the lower cost, and bad governments, who want the agency
to earn some rents, as these rents are then shared with the government itself.
As usual, citizens do not observe the type of governments but have only some
a-priori information on the probability that governments are of the good type.
In each period, the government chooses the contract for the agency and the tax
on citizens; citizens only observe the tax they pay and the quality of the service
they receive. At the end of the rst period there is an election and citizens
decide whether re-electing the incumbent or electing an opponent.
The contract that the government can oer to the agency can be of two types:
a "complex rule", where the agency is paid on the basis of the eort that it
makes; or a "at rule" where the retribution to the agency is the same whatever
eort the agency makes. The at rule is clearly inecient; as the payment is
the same whatever eort it makes, the agencys optimal reply to the at rule is
always to choose the lowest level of eort. The conclusion is that if governments
could be trusted (they were known to be good with probability 1) the best
contract would certainly be the complex rule, where governments are allowed to
use their superior information to elicit more eort from the agency. Bordignon &
Minelli however show that under some parametric conditions citizens are better
o if politicians are forced to oer only the at rule to the agency. The reason
is that under the complex rule, bad governments can more easily collude with
the agency, leaving rents to the agency without the citizens observing them and
therefore with the bad politicians being re-elected at the end of the rst period.
Under the at rule, citizens know that the agency can only oer a low level
of eort, so that any payment to the agency above the minimal level would
be a clear indication that the incumbent is a bad type who is trying to fool
them. The increased transparency in government policy making induced by
the at rule may overcome the eciency loss induced by the some rule. This
might explain why public sector rules are less incentivating, e.g. depend less
on available information, than private sector ones. See also Coate and Morris,
Jpolecon, 1995.
17
Local taxation and accountability.
It is often argued that accountability of local politicians is increased if they
have more tax autonomy, but robust evidence is lacking. Bordignon & Piazza
(2010) use a 1999 reform of municipal nancing in Italy to cast some light on
this issue. In 1999 Italian municipalities were given the opportunity to impose
a surcharge tax on the Personal Income Tax of their residents (PIT) in addition
to their traditional local property tax. But there was a dierence between
the two souces of nancing. While the property tax rate was esclusively a
responsability of local government, the PIT remained largely a responsability of
national government, who marginally adjusted it on a yearly basis. It can then
be argued that citizens had diculties in discerning in the total PIT tax they
paid, the part that was due to local (from the part it was due) and to national
government decisions. To study the eect of this reform on the accountability
of local government and derive testable implications, Bordignon & Piazza set
up a agency model of politics.
In the model, local politicians (Mayors) are welfarist, like to be in power,
but dislike having to make eort in order to improve the functioning of local
administration. Mayors come of two types; competent and incompetent, where
for competent mayors the unitary cost of exerting eort is lower than for incom-
petent mayors. Eort can be used as a substitute for local taxation; exerting
more eort, Mayors can provide a x level of public good at a lower cost for
citizens (e.g. taxing them less). There are two periods and an election at the
end of the rst period. As usual, citizens do not know the type of government
but only the distribution of good types; they also do not observe the eort; they
only observe the tax they pay and the public good they receive.
The model is rst solved in the case where Mayors can only impose the
property tax, t, (as in the pre-reform period in Italy). The conclusion is that
incompent Mayors will mimick the compentent ones in the rst period, that is,
exert the same eort of competent ones and therefore choose the same property
tax rate t

, only if the future matters enough, i.e. if the rate of discount c _ c

1
,
and will separate otherwise (e.g. selecting a higher property tax rate and then
be unseated at the elections, as the citizens would then understand that they
are of the lower type and vote for the opponent), where 0 < c
1
< 1.
Next, the model looks at the case where Mayors are also given the opportu-
nity to use the PIT surcharge (as in the post-reform period in Italy). Citizens
observe the total income tax they pay, 0, but do not know the composition of
this rate in the national and local component. In particular, after the reform,
0 = T + t where T is the national tax rate and t is the local one. National
government moves rst selecting either T or T, where T T , depending on
the realization of some exogenous shock (i.e. general conditions of public -
nance). Local governments observe the move of central government; citizens
dont. Citizens only know the distribution of the shock, so they expect that T
is chosen with some probability . This uncertainty oers incompetent Mayors
another possibility to mimick the good government; they can now pretend that
national government has set a higher tax rate T (while in fact it has chosen T)
and choose t

so as to select the same total tax rate on income that would result
18
if the national government had in fact selected T and the competent type had
optimally replied by setting t(T); that is, by setting t

+T = T +t(T) = 0. By
the local government budget constraint, this implies that by playing this mim-
icking strategy, the incompetent mayor can now imitate the competent type at
a lower cost in terms of eort than in the pre-reform case. The paper shows
that under some conditions (e.g. _
1
2
) the citizens will indeed re-elect the
incumbent if they observe 0 (and of course t(T)), and as a consequence, incom-
petent mayors will be prepared to play this less costly mimicking strategy in a
larger set of cases, that is, for c _ c
2
, where c
2
< c
1
. The conclusion is that
the Italian reform has reduced the accountability of local politicians; as there
is now a less clear-cut distribution of responsability on local taxation, pooling
equilibria in the rst period can now be substained more easily than in the
previous case (e.g. for all values of c [c
2
, c
1
]). Assuming that there is some
distribution of c, 1(c) in the population of mayors, the model then produces
a number of testable implications: 1) after the reform, rst term mayors, who
have electoral incentives, should use the PIT surcharge more than second term
mayors (in Italy, mayors are subjected to a term limit, they can only run twice);
2) following the reform, there should be a reduction in the turnover of mayors
3) as is easily to be re-elected, incumbent mayors should be more willing to
run again after the reform. Bordignon and Piazza provide empirical evidence in
support for these implications. On decentralization and accountability, see also
Lockwood and Hindricks (JEurpolecon, 2008).
19