Political yardstick competition and policy innovations

Economics

Speaker:Christos Kotsogiannis, University of Strathclyde, Glasgow
Date: Friday 2 March 2001
Time: 16:15
Location: Room 106 Streatam Court

Further details

This paper investigates the policy choices, under conditions of political uncertainty, in federal systems. We develop a model within which there are two types of politicians, 'bad' and 'good'. The politicians provide a policy using either a well-known technology or some innovative device with unknown quality. They collect taxes to finance the policy but may also extract rents from the voters. The model also introduces a yardstick information which reveals the new policy's quality with some probability. It is shown that as the yardstick probability increases the separating equilibrium (in which the 'good' politician chooses the innovative policy and the 'bad' the old policy) becomes more likely while the pooling equilibrium (where both types choose the new policy) becomes less likely. A principal lesson is that, if the yardstick probability is increasing in the number of lower level governments (as conventional wisdom has it), then a decentralised system may be associated with sorting out the types of politicians. Innovation, however, becomes less likel since the bad policy maker increasingly turns to the old policy.