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
Date Written: April 20, 2017
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
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