Polarization and Inefficient Policies

Abstract

of the economy, in this case the costs of producing a public good. The parties each propose a policy, an election is held and the policy of the winning party is implemented. Voters and parties care about the level of the public good and costs. Two kinds of sequential equilibria exist; revealing, where voters learn the true costs and the implemented policy adjusts to costs, and non-revealing. If parties' preferences are polarized only non-revealing equilibria fulfill a refinement criterion like the intuitive criterion. If they are alike only revealing equilibria fulfill this criterion. Thus less political polarization improves information revelation. In electoral democracies, policy-motivated parties are likely to be better informed about the functioning of the economy than are voters. This paper presents a model where two parties, but not voters, are informed about the cost of producing a public good. We study whether an electoral democracy leads to efficient production of the public good given this asymmetry of information. In particular, under which circumstances will the implemented policy (the level of the public good) reflect actual costs? The main result is that the policy will reflect costs if and only if at least one of the parties has preferences which are sufficiently similar to the median voter's. In this sense polarization leads to inefficiency. The public good can be, for instance, infrastructure, medicare or military services. Both a continuum of voters and the parties have preferences over the amount of the good that is provided by the government. The preferences of the two parties are situated on each side of those of the median voter. The costs of providing the good are not precisely known to the voters, who only know the distribution of costs and that they will pay for these costs as taxpayers. On the other hand, the parties know the costs.