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Dynamic Government Performance: Honeymoons and Crises of Confidence

Listed author(s):
  • David P. Myatt
  • Torun Dewan

We model the interplay between a government's performance, its expected lifetime, and the confidence it enjoys. Here, "confidence" can be broadly interpreted as the government's popularity, the size of its parliamentary majority, its reserve of talent, or other factors. Confidence evolves in response to performance, and if it evaporates then the government falls. We analyze how confidence influences ministers' behavior. A minister's tenure is determined by the performance of both himself and others. He chooses higher performance when the government is expected to last, which is so when others perform well. Multiple equilibria arise: in an optimistic equilibrium, high performance sustains a government indefinitely; in a pessimistic equilibrium, the government's expected demise is a self-fulfilling prophecy. When confidence evolves stochastically, however, there is a unique equilibrium in which a crisis of confidence begins if and only if negative shocks shift confidence below a critical threshold.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 500.

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Date of creation: 01 Aug 2010
Handle: RePEc:oxf:wpaper:500
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