Incentive Contracts for Politicians and the Down-Up Problem

12 Pages Posted: 28 Feb 2000

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: May 1999

Abstract

Many efficient policies imply a temporary deterioration of GDP while the benefits accrue to voters later. Such policies have a down-up characteristic. We show that voters cannot motivate politicians to invest in down-up policies by their reelection decision. The incumbent either undertakes short-term policies or sticks with the status quo. We show that adding an incentive element to the reelection mechanism can solve the investment problem of down-up policies. If a politician wants to stand for reelection, he must accept that his future income or his future reelection possibilities are dependent on macroeconomic developments. Finally, we comment on practical issues when such contracts are used in election races.

JEL Classification: D72, D82

Suggested Citation

Gersbach, Hans, Incentive Contracts for Politicians and the Down-Up Problem (May 1999). Available at SSRN: https://ssrn.com/abstract=172551 or http://dx.doi.org/10.2139/ssrn.172551

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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