Rational inattention and politics: how parties use fiscal policies to manipulate voters

We model a two-party electoral game with rationally inattentive voters. Parties are endowed with different administrative competencies and announce a fiscal platform to be credibly implemented in case of electoral success. The budgetary impact of each platform depends on the party’s competence and on a stochastic implementation shock. Voters rely on the announced platform to infer a party’s unobserved competence. In addition, voters receive noisy signals on the impact of each fiscal platform with noise depending ultimately on a voter’s cognitive skills. We predict that the interplay between the desire of parties to win the election (the incentive to manipulate voters’ beliefs) and voters’ (lack of) cognitive skills (the scope for manipulation) distorts fiscal policies towards excessive budget deficits. The mechanism is that parties attempt to manipulate inferences on their competencies by implementing a loose fiscal policy. The predictions are tested empirically on a sample of advanced economies over years 1999–2008. Our results remain stable after controlling for potentially confounding differences across countries and over time, along with unobserved heterogeneity. Finally, alternative mechanisms potentially driving our results are investigated and ruled out.

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The incumbent’s preference for imperfect commitment

Monotone comparative statics in the Calvert–Wittman model

Electoral competition under costly policy implementation

Notes

In the manipulation literature (Rogoff and Siebert, 1988, for instance), excessive public expenditure or excessively low taxation are used to induce uninformed voters to overestimate parties’ administrative abilities. Manipulation of imperfectly informed voters, however, does not represent the unique explanation for excessive budget deficits. Alternative mechanisms are based on common resources externalities (see Weingast et al., 1981) and on rent extraction. Rents may come from financing preferred public goods (Alesina and Tabellini, 1990) or in transferring resources to preferred groups (Battaglini and Coate 2008). For a recent survey of those different mechanisms, see Yared (2019).

In principle, voters’ beliefs are less likely be manipulated when voters can access more sources of transparent information freely (Alt and Lassen, 2006; Shi and Svensson, 2006). However, even if many high-quality sources are available at no out-of-pocket expense, information remains costly owing to the time necessary to interpret and process its content.

The assumption of binding electoral announcements is pervasive in the literature (see, for instance, Schultz, 1996; Persson and Tabellini, 1999; Martin and Stevenson, 2001; Bellettini and Roberti, 2020). Two contributions, Alesina (1988) and Aragones et al. (2007), have rationalized the assumption by looking at reputational mechanisms. Other studies have argued that the announcements also influence the formation of coalitions and the selection of policies (Austen-Smith and Banks, 1988; Bandyopadhyay and Chatterjee, 2006; Debus, 2009).

Think, for instance, of the risk premium demanded by lenders, the chance of a debt crisis and the macroeconomic costs following abrupt fiscal consolidation. The quadratic form implies a loss of welfare even if the current budget balance is larger than T. In equilibrium, however, that case is ruled out.

In Fig. 1a and 1b, the values assigned to \(\sigma_^\) entail substantial uncertainty about the budgetary effects of fiscal platforms. Under full information ( \(\lambda\) = 1) and with T = 0, the variance \(\sigma_^ = 0.1\) ( \(\sigma_^ = 0.2) \) implies that the balance deviates by more than 20% (30%) from its expected value with a probability larger than 0.5.

The relationship between party polarization and the intensity of political competition also is emphasized in the political science literature. McCarty et al. (2006) link increasing campaign expenditures in US elections to the greater polarization of candidates. It is worth noting that the notion of government polarization is associated neither with the divide between majoritarian and proportional electoral systems nor with voter polarization. Regarding the former, one may have a polarized cabinet within a coalition, and a non-polarized cabinet under a majoritarian system. Hence, our measure of polarization is unlikely to capture the common pool externality that affects fiscal policies under coalition governments. With respect to the latter, an influential political science scholar (Fiorina 1999) enlists voter polarization as only one of seven possible sources of party polarization.

The countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

As explained in the theoretical section, we follow some influential previous literature (Alesina, 1988; Aragones et al., 2007; Martin and Stevenson, 2001; Persson and Tabellini, 1999; Schultz, 1996) and assume binding electoral announcements (for details, see footnote 3). Accordingly, a polarized pre-electoral environment is conducive to an ideologically polarized government; thus, a post-election variable can capture pre-election concerns.

We also rely on two other measures to control for the education level as further robustness checks. Specifically, we consider the education component of the Human Development Index provided by the United Nations (measured as the average of years of schooling of adults and children) and the tertiary education enrollment rate provided by UNESCO. All conclusions hold.

The conclusion follows from the complexities of the public budgets of advanced economies and from the difficulties in assessing the full welfare effects of an expenditure shock (Alesina and Perotti 1996).

Sampled presidential democracies are France, Switzerland, and the United States. Switzerland is a special case of presidential democracy because the president enjoys no formal powers, and the post rotates every year. Our results hold when excluding France and the United States from and keeping Switzerland in the sample.

The CPI is computed by Transparency International based on perceptions of corruption by businesspeople, risk analysts, and the general public. The index ranges between 10 (highly clean) and 0 (highly corrupt). The 0–10 scale has been adopted from 1995 to 2011. In 2012, Transparency International revised the methodology applied in building the index, also widening its range from 0 to 100. It is worth noting that we rely on the CPI because it is the most widely accepted indicator of corruption worldwide (e.g., Donchev and Ujhelyi 2014; Qu et al., 2019).

It is measured by the probability that two randomly picked government deputies belong to different parties.

Alternatively, we augment the equation with a dummy that equals one in the year before elections and, again, the baseline results remain unchanged.

The same conclusion can be reached with other measures from different sources, such as those described in footnote 9.

It is worth noting that when voter turnout is defined as percentage of the voting-age population, the denominator leaves out those that have not yet reached the age at which one is legally allowed to vote, i.e., 18 years old in most Western countries (see Geys, 2006). This may explain the different sign of the correlation, even being not statistically significant. This is consistent with the above argument that LITERACY captures different voters’ skills than general education, which is usually found to elevate electoral participation.

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Author information

Authors and Affiliations

1. Utrecht University, Adam Smith Hall, Kriekenpitplein 21-22, 3584 EC, Utrecht, The Netherlands Samuele Murtinu
2. Universitas Mercatorum, Piazza Mattei, 10, 00186, Rome, Italy Giulio Piccirilli
3. Department of Economics, Society, Politics, University of Urbino, Via Saffi 42, 61029, Urbino, Italy Agnese Sacchi

1. Samuele Murtinu