Two Roles for Elections: Discipling the Incumbent and Selecting a Competent Candidate

This paper presents a political economy model in which the voters want to control moral hazard on the part of the incumbent and select a competent candidate to be in office. We focus on elections which take place repeatedly as the basic disciplinary and screening mechanism. It is shown that having the possibility of reelecting a government increases the welfare of the voters with respect to the no reelection benchmark. A second finding is that economic performance strongly influences the reelection of the incumbent. In particular, in (stationary perfect bayesian) equilibrium, if economic performance is bad, the incumbent will not be reelected. A final result compares two mechanisms which link politicians with voters: (i) the election-based incomplete contract; and (ii) an explicit incentive scheme that rewards with a second mandate good economic performance. The paper shows that in our model the second alternative is better for voters' welfare.