HOW CYNICAL CAN AN INCUMBENT BE - STRATEGIC POLICY IN A MODEL OF GOVERNMENT SPENDING

When parties with different preferences compete for election, strategic manipulation of state variables for electoral purposes can occur even with rational voters. This paper presents a model in which government resources can be used 'productively', for the benefit of everybody, or 'unproductively', for the benefit of the ruling party's constituency. A government more inclined to unproductive spending may choose to collect public resources inefficiently in order to reduce the importance of spending decisions in the election. The model highlights the strategic role of policy decisions that affect incentives and constraints faced by future governments, and their impact on election results.