Competition of Politicians for Incentive Contracts and Elections
23 Pages Posted: 21 Mar 2001
Date Written: May 2002
When politicians are short-term oriented or future elections do not sufficiently reflect the success of past policies, democratic elections cannot motivate politicians to undertake long-term socially beneficial projects. When politicians can offer incentive contracts which become effective upon reelection, the hierarchy of contracts and elections can alleviate such inefficient decision-making in politics. This mechanism still works if the public cannot commit itself to a reelection scheme or if the public is unsure about the politicians' time preferences. In the non-commitment case, incentive contracts may need to include a golden parachute clause.
Keywords: Incentive Contracts, Politicians, Long-term Policies, Elections and Contracts, Golden Parachute Clause
JEL Classification: D72, D82
Suggested Citation: Suggested Citation