How cynical can a incumbent be? Strategic policy in a model of government spending

When governments with different preferences compete for election, strategic manipulation of state variables can occur even with rational, forward-looking voters. In particular policy commitments may be used to introduce "strategic inefficiencies" for electoral purposes. This paper presents a simple model of government spending, in which government resources can be used "productively" -- for the benefit of all voters -- or "unproductively" -- for the sole benefit of the ruling party''s constituency. We show that a government may choose to limit the efficiency with which some public resources are extracted if it is more likely to use them unproductively, because in so doing it limits the importance of spending decisions in the electoral process. More generally, we highlight the strategic role of economic policy decisions which affect incentives and constraints faced by future governments, and their impact on election results. We also analyze how the time horizon and electoral uncertainty affect the incentives for strategic behaviour.