Abstract
Many efficient policies imply short-term costs while the benefits accrue to voters later. Often voters cannot motivate politicians to invest in such down-up policies by their reelection decision. Adding a further incentive element to the reelection mechanism, however, can solve the underinvestment problem. If a politician wants to stand for reelection, he must accept that his future income or his future reelection possibilities are dependent on future developments. We suggest that the dual mechanism — incentive contracts and elections — might alleviate a wide range of potential inefficiencies in democratic decision-making.
My thanks to Peter Bernholz, Ulrich Erlenmaier, Joao E. Gata, Volker Hahn, Douglas Hibbs, Verena Liessem, Otto H. Swank, Gisèle Umbhauer, Heinrich Ursprung, Uwe Wehrspohn, conference participants at the annual meeting of the European Public Choice Society 2000 and of the meeting of the Society for Economic Design, seminar participants in Heidelberg and Mannheim and the referee for valuable suggestions and comments.
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Gersbach, H. (2003). Incentive Contracts and Elections for Politicians and the Down-Up Problem. In: Sertel, M.R., Koray, S. (eds) Advances in Economic Design. Studies in Economic Design. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-05611-0_4
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