Political Competition and the Limits of Political Compromise

44 Pages Posted: 2 Jun 2014

See all articles by Alexandre B. Cunha

Alexandre B. Cunha

Universidade Federal do Rio de Janeiro (UFRJ)

Emanuel Ornelas

Sao Paulo School of Economics

Date Written: March 2014

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 tradeoff between restricting political competition and constraining the ability of governments to issue debt.

Keywords: efficient policies, political turnover, public debt

JEL Classification: E61, E62, H30, H63

Suggested Citation

Cunha, Alexandre B. and Ornelas, Emanuel, Political Competition and the Limits of Political Compromise (March 2014). CEPR Discussion Paper No. DP9909, Available at SSRN: https://ssrn.com/abstract=2444852

Alexandre B. Cunha (Contact Author)

Universidade Federal do Rio de Janeiro (UFRJ) ( email )

Av. Pasteur, 250
Rio de Janeiro, RJ 22290240
Brazil

HOME PAGE: http://www.alexbcunha.com

Emanuel Ornelas

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/

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