Voting equilibria and public funding of political parties

Direct public funding to political parties exists in most OECD countries and its allocation is executed on the basis of two principles: (i) proportional to the votes (or alternatively the number of seats), and (ii) equal distribution. We consider a situation in which there are two scenarios and two policies, where the optimal policy for each scenario is different. We study which policy is implemented when public political funding is introduced and voters are uncertain about the realized scenario. First, when the goal is to implement the optimal policy, we find that direct public funding to political parties is necessary if voters are more likely to be right than wrong about the scenario. Second, we characterize all equilibria based on voters' beliefs, the amount of money proportionally allocated, and the parties' preferences over the pairs scenario-policy and being in office.