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Political Competition and the Limits of Political Compromise

Alexandre Cunha and Emanuel Ornelas

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if they expect future governments to do the same. We find that, if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative trade-off between restricting political competition and constraining the ability of governments to issue debt.

Keywords: Political turnover; efficient policies; public debt (search for similar items in EconPapers)
JEL-codes: E61 E62 H30 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-pol
Date: 2014-03
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Related works:
Working Paper: Political Competition and the Limits of Political Compromise (2014) Downloads
Working Paper: Political Competition and the Limits of Political Compromise (2014) Downloads
Working Paper: Political competition and the limits of political compromise (2014) Downloads
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