Competition of Politicians for Incentive Contracts and Elections
CESifo, Munich, 2001
CESifo Working Paper No. 406
When politicians have lower discount factors than voters, democratic elections cannot sufficiently motivate politicians to undertake long-term socially beneficial projects. When politicians can offer incentive contracts which become effective upon reelection, the hierarchy of contracts and elections can alleviate such inefficient decision-making in politics. This mechanism still works if the public cannot commit itself to a reelection scheme or if the public is unsure about the politicians’ time preferences. In the non-commitment case, incentive contracts may need to include a golden parachute clause. Keywords: Incentive contracts, politicians, long-term policies, elections and contracts, golden parachute clause