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Credible communication in dynastic government

  • Lagunoff, Roger

This paper examines the mechanics of intertemporal information provision in {\em 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, effective deterrents even in the ``good" periods (when the auditor's and the regime's biases differ) are difficult to construct. In all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices. The main result shows that these constraints typically bind away from optimal policies in standard constructions of equilibrium.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 90 (2006)
Issue (Month): 1-2 (January)
Pages: 59-86

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Handle: RePEc:eee:pubeco:v:90:y:2006:i:1-2:p:59-86
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