Political accountability with endogenous party formation

The paper analyzes a game-theoretic model of overlapping generations of politicians in a democracy where elections are fair and competitive. The outcome for voters can differ substantially: in one equilibrium, we have endemic corruption with no provision of public goods, many short-lived political parties, and high electoral volatility. In another equilibrium, competition in policy platforms reduces corruption and electoral volatility to a minimum, with long-lived political parties being reduced to a few. The model offers a novel way to study the last-period effect of political leaders and suggests an endogenous mechanism by which the inter-generational structure of political parties can produce accountability. Thus, our model indicates that important institutional differences among electoral democracies need to be considered to assess the impact of democracies on both economic and political outcomes. We provide examples and cross-country correlations that support the predictions of our model.