This paper examines the mechanics of intertemporal information provision in dynastic governments. It has been suggested that "horizontal accountability," i.e., a system of governance where auditing functions lie outside the executive branch, can ensure credible disclosure of information. The results here suggest a cautious approach to that view. Government is modelled as a dynastic sequence of regimes. Each regime rules for one period, chooses an expenditure level, then relinquishes power to its successor. When information about past policy choices comes exclusively from the reports of previous regimes, each regime has an incentive to choose its (suboptimal) one shot expenditure policy, and then misrepresent its choice to its successor. I examine the credible communication equilibria taking into account the reporting incentives of an auditor who can independently verify the information each period. In an environment where "liberal" (i.e., those prefering larger government expenditures) and "conservative" (those prefering smaller expenditures) regimes and auditors evolve over time, it is shown that: "conservative" ("liberal") auditors are not credible when the current regime is also "conservative" ("liberal"). Moreover, because information transmission stops when the auditor's and the regime's biases coincide, e_ective deterrents even in the "good" periods (when the auditor's and the regime's biases di_er) are di_cult to construct. In all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for e_cient policy choices. The main result shows that these constraints typically bind away from optimal policies in standard constructions of equilibrium.
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gueconwpa~02-02-04.
Length: Date of creation: Date of revision: Handle: RePEc:geo:guwopa:gueconwpa~02-02-04
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Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dixit, A. & Grossmann, G.M. & Gul, F., 1998.
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Chari, V V & Kehoe, Patrick J, 1990.
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V.V. Chari & Patrick J. Kehoe, 1989.
"Sustainable plans,"
Staff Report
122, Federal Reserve Bank of Minneapolis.
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