Le Borgne, Eric (2001) Institutions, politics, and macroeconomic performance : on incomplete information in political agency games. PhD thesis, University of Warwick.

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Abstract

This thesis analyses the interactions between politics, institutions, and policy
outcomes using a political agency framework with incomplete information. After an
introductory chapter, we develop a political agency model that is consistent with the
empirical evidence on politically-induced fiscal cycles, and especially budget deficit
cycles. We find that electoral concerns create, on average, a rising budget deficit prior
to elections. The net welfare effect of elections is ambiguous: although they give rise
to a deficit bias, they increase the quality of office-holders. The next chapter uses this
microfounded model to study the incentive and welfare effects that the imposition of
fiscal constraints has on policy makers' decision to create excessive deficits. Three
types of constraints are investigated: deficit ceilings, a Golden Rule of public investment,
and a balanced-budget rule. We find that constraints are effective in reducing
excessive budget deficits - although at the expense of unconstrained instruments.
Only one can yield higher welfare than the fully discretionary case. No appropriately
designed fiscal constraint can achieve the first-best.
In Chapter 4, we show that two key results in the political agency literature are
not robust. The first is that a cutoff rule followed by voters in re-electing an incumbent
always motivates the latter. The second is that this cutoff rule is an optimal
incentive mechanism. Under symmetric incomplete information, the first result can
be reversed since elections can reduce the experimentation effect of office-holders (i. e.
the incentive to raise effort so that performance becomes a more accurate signal of
ability). This reduction may more than offset the positive effect of elections on effort.
When incentives to stand for office are modelled, result two can be overturned
since a revealing equilibrium at the candidate entry stage can always be designed.
This screens out low-ability citizens from policy making and therefore eliminates the
adverse selection problem. If this latter is more important than moral hazard issues,
the cutoff rule at the policy stage is no longer an optimal mechanism.
In Chapter 5, we investigate in more details whether relevant (private) information
about citizens' competence in political office (ability, honesty, etc. ) can be revealed
by their entry and campaign expenditure decisions. We find that this depends on
whether voters and candidates have common or conflicting interests; only in the
former case can entry be revealing in equilibrium. We apply these results to Rogoff's
(1990) Political Budget Cycles model, allowing for candidate entry: as interests are
common, low-ability candidates are screened out at the entry stage, and so there is
no signalling via fiscal policy. In a variant of the Rogoff model where citizens differ
in honesty, rather than ability, interests are conflicting, and so the political budget
cycle can persist in equilibrium. The final chapter concludes the thesis.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory J Political Science > JC Political theory
Library of Congress Subject Headings (LCSH):	Political business cycles, Budget deficits, Elections -- Economic aspects, Economic policy
Official Date:	May 2001
Dates:	Date Event May 2001 Submitted
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Lockwood, Ben
Sponsors:	Economic and Social Research Council (Great Britain) (ESRC) (R00429734527) ; University of Warwick. Centre for the Study of Globalisation and Regionalisation ; University of Warwick. Department of Economics
Extent:	346 leaves
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/52262

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