A Reputational Theory of Two Party Competition
We propose a reputational theory of two-party competition. We model the interaction of parties and the electorate as a stochastic game of incomplete information. The parties’ preferred policies (moderate or extreme) are possibly revealed to the electorate only via their policy choices while in government, and partisan preferences change with positive probability following defeat in elections. Due to inertia within party organizations, party preferences display positive serial correlation. When partisans care sufficiently about office, extreme policies are pursued with positive probability by the government only when the ruling party is perceived relatively more extreme than the opposition. In equilibrium such policies occur when (a) both parties are perceived to be more extreme than a long-run benchmark level, and (b) neither party holds a significant advantage regarding its perceived extremism by the electorate. Equilibrium dynamics produce two qualitatively different adjustment paths: one exhibits polarized politics such that there is positive probability of non-moderate policies in the future for a protracted period of time; the other possible adjustment path produces moderation with probability one in all periods. Both adjustment paths are such that one of the two parties (possibly different over time) may win successive elections with high probability in equilibrium.
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