Signaling in Political Cycles: How Far are You Willing to Go?

Abstract

Previous results on political cycles as a signal of competency assumed that opportunism was common knowledge. If opportunism is not common knowledge, there may be a partially pooling equilibrium where cycles indicate opportunism rather than competency. Insofar as more discretionality increases the asymmetry of information, the possibility of cycles increases, and elections may become less effective to select competent incumbents.

Keywords: rational political budget cycles, two-dimensional asymetric information, signaling, adverse selection, visibility

JEL Classification: D7, E6