Political agency model of persistent electoral success with endogenous rents

The paper presents a political agency model that observes how budgetary decisions on public good production affect the prospects of holding office for an incumbent political party. A simple budgetary function is broadened to include other expenditures such as public sector wages and social transfers so as to present a constraint to rent-extraction. Upon this a ratio of public goods to other expenditures is determined, which the party must keep within certain boundaries set by the voters. Rents are extracted from public good expenditures instead of being exogenously given as a part of a budget, as the party must be able to conceal rent-extraction due to constitutional boundaries. The incumbent’s decision on rents and public good production directly affects the state of the economy upon which the voters decide whether to re-elect the incumbent or not. Incumbents make their decisions based on observing the economic growth shock. For high levels of growth they decide to respect the voter re-election rule, while for low levels they will defect and extract maximum rents. In a repeated game setting an incumbent will always chose the optimal strategy with respect to the observed growth shock. This way, for high enough levels of economic growth an incumbent party may stay in office for an infinite amount of periods and keep maximizing rents with respect to the given constraints, without having to trade-off rents for holding office. The paper presents empirical evidence on United States gubernatorial and state legislature elections from 1992 to 2008 to evaluate the underlining theory.