Political Exchange and the Allocation of Surplus: A Model of Two-Party Competition

Abstract

We discuss a simple model of political competition which is explicitly grounded on economic analysis of the political exchange. We argue that an act of exchange always gives rise to a common surplus on which both “parties” in the exchange are entitled to make a claim. We investigate exchange and competition in a political setting from this abstract perspective. A party’s platform specifies the amount of surplus which will be distributed to society (thus stating, by subtraction, the surplus appropriated by parties) and the way in which it will be distributed among society’s agents.

In the simplest case of two-party competition with linear platforms, a unique solution for the game is found which is the only subgame perfect Nash equilibrium that strictly Pareto dominates every other equilibrium. In this equilibrium we obtain a result which contrasts with the standard median voter’s: parties’ platforms are not undifferentiated to voters’ eyes — they are ideologically identifiable. Moreover, in equilibrium a positive share of surplus will be appropriated by parties. Finally, both the degree of ideological characterization of parties and the share of the surplus distributed to society increase in the majority premium, approximated by the slope, evaluated at the 50% of votes, of the function that maps shares of votes into shares of “power”. When this slope goes to infinity the surplus is entirely distributed to society, but parties — though not necessarily voters — are indifferent among all platforms.