Policy experimentation, political competition and heterogeneous beliefs

Antony Millner (1) , Hélène Ollivier (2, 3) , Leo Simon (4)

1 LSE - London School of Economics and Political Science
2 CES - Centre d'économie de la Sorbonne
3 PSE - Paris School of Economics
4 LBNL - Lawrence Berkeley National Laboratory [Berkeley]

We consider a two period model in which an incumbent political party chooses the level of a current policy variable unilaterally, but faces competition from a political opponent in the future. Both parties care about voters' payoffs, but they have different beliefs about how policy choices will map into future economic outcomes. We show that when the incumbent party can endogenously influence whether learning occurs through its policy choices (policy experimentation), future political competition gives it a new incentive to distort its policies – it manipulates them so as to reduce uncertainty and disagreement in the future, thus avoiding the costs of competitive elections with an opponent very different from itself. The model thus demonstrates that all incumbents can find it optimal to ‘over experiment’, relative to a counterfactual in which they are sure to be in power in both periods. We thus identify an incentive for strategic policy manipulation that does not depend on self-serving behavior by political parties, but rather stems from their differing beliefs about the consequences of their actions.

Mots clés: beliefs; learning; political economy

Domaines: Economies et finances

Antony Millner, Hélène Ollivier, Leo Simon. Policy experimentation, political competition and heterogeneous beliefs. 2014. ⟨halshs-01022728⟩