A Dynamic Model of Electoral Competition with Costly Policy Changes

CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 17/270, April 2017

52 Pages Posted: 20 Apr 2017

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)

Philippe Muller

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Oriol Tejada

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: April 20, 2017

Abstract

We consider an infinite-horizon model of elections where policy changes are costly for citizens and parties. The so-called costs of change increase with the extent of the policy shift and make policy history-dependent. First, we provide a detailed description of the equilibrium dynamics and analyze how policies are influenced by history, costs of change, party polarization, and the incumbent's ability. We show that policies converge to a stochastic alternation between two states and that in the long run costs of change have a moderating effect on policies. Second, we analyze welfare as a function of the marginal cost of change. If the initial level of policy polarization is low, welfare is highest for intermediate marginal costs of change. Moreover, any positive level of costs of change will benefit society if the future is sufficiently valuable. If the initial level of policy polarization is high, however, welfare will be highest for low or zero costs of change.

Keywords: democracy; dynamic elections; political polarization; costs of change; Markov perfect equilibrium

JEL Classification: C72, C73, D72, D78

Suggested Citation

Gersbach, Hans and Muller, Philippe and Tejada, Oriol, A Dynamic Model of Electoral Competition with Costly Policy Changes (April 20, 2017). CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 17/270, April 2017 . Available at SSRN: https://ssrn.com/abstract=2955712 or http://dx.doi.org/10.2139/ssrn.2955712

Hans Gersbach (Contact Author)

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

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IZA Institute of Labor Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Philippe Muller

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

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Zurich, 8092
Switzerland

HOME PAGE: http://www.mip.ethz.ch/people/person-detail.html?persid=122870

Oriol Tejada

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
41446329693 (Phone)

HOME PAGE: http://www.cer.ethz.ch/mip/people/toriol

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