PE: Electoral Competition

Krzysztof Makarski

Electoral Competition

Assumptions
Starting point Hotelling (1929) and Downs (1957).
Suppose that elections involve two identical politicians (or parties).
Politicians are opportunistic in the sense they strive to maximize their vote share, or alternatively
probability of winning.
Politicians can make binding commitments to policy platforms in the course of electoral campaign.
The outcome is the Condorcet winner (if exists).
We next show it formally but intuition is very simple, with two alternatives (and one stage) all voters
vote sincerely, thus a policy platform coinciding with a Condorcet winner always captures at least half
of the vote when it is up against any other platform.

1.1

Introduction

A Simple Model of Public Finance

Suppose there is measure one [continuum] of individuals i [0, 1]. Each agent i has the same quasilinear preferences over private consumption c and public good g which is given by
i = ci + H(g)
W

(3.1)

where H() is a concave and increasing functions. Note that (3.1) implicitly (unrealistically) assumes
that g cannot be targeted to specific groups.
Income differs across individuals, but government cannot differentiate taxes therefore the budget constraint is
ci = (1 )y i
(3.2)
where y i is distributed in the population according a a cumulative distribution function (c.d.f.) F ().
Denote the average income as y = E(y i ), where E denotes expected value. Denote the median value
of income as y m (note F (y m ) = 0.5). We assume y m < y, which means that the distribution is skewed
to the right (similarly as we observe in virtually every country).
Government revenue y is spend on public consumption g to satisfy BC g = y.
The policy preferences in terms of policy g ( has to satisfy the budget constraint) can be obtained by

substituting into W
i
W

= ci + H(g)
(1 )y i + H(g)
g
= (1 )y i + H(g)
y

Therefore

yi
(y g)
y
which is concave in policy g, implying that every citizen has a uniquely preferred policy.
W i (g) = H(g) +

(3.3)

 To find the preferred policy of agent i, g i take the derivative of W i (g) w.r.t. g to obtain

0
yi
+ H (g)
y
0

H (g)

yi
y

Since H() is increasing it has an inverse and we have

0

g i = (H )1 (

yi
)
y

(3.4)

Concavity of H implies that richer individuals want smaller government (since they pay lower taxes
then). For example, consider H(g) = log g then (3.4) becomes g = yyi .
Note that clearly (3.3) satisfies intermediate preferences property.
Denote agents type as i = y i so that the higher type means poorer agent. Then since W i (g) =
i
H(g) + yy (y g) we have
W (g; i ) = H(g)

i
i
(y g) = H(g) + (g y)
y
y

which satisfies the single crossing condition since

0
W (q, i )
i
= H (g) + ,
g
y

2 W (q, i )
1
= 0.
i
g
y

Let W be the normative benchmark

Z

W i (g)dF = W (g)

W =
i[0,1]

(note: the formula above is the sum of individual utilities with equal weights)
0

Therefore the utilitarian objective (the socially optimal policy) satisfies W (g) = 0 which gives g =
0
(H )1 (1), for example for H(g) = log g we have g = 1.
Downsian Electoral Competition
Assume there are two parties indexed by P {A, B}. Each party once in power receives an exogenous
rent R. Denote the probability that party P wins an election as pP and the vote share of party P as
P .
Timing:
The two candidates simultaneously and noncooperatively announce their electoral platforms: gA
and gB .
Elections are held in which voters choose between two candidates.
The elected candidate implements her policy platform.
We start with assumption that everyone has the same income y i = y (income distribution is degenerate).
Each voter votes for the candidate with the platform that gives them the highest utility. Furthermore,
we assume that if voter is indifferent she tosses a coin. This implies the following probability of winning
for candidate A:

0 if W (gA ) < W (gB )

1
if W (gA ) = W (gB )
pA =
2
1 if W (gA ) > W (gB )
If everybody is the same policy g (policy desired by average citizen) is preferred by everyone. Therefore,
we have a subgame perfect equilibrium in which gA = gb = g . And both candidates converge towards
socially optimal policy. Proof is quite trivial.
2

Median-Voter Equilibria
Suppose that income distribution is not degenerate and is given by the cumulative distribution function
(c.d.f.) F () that is a continuous function.
Since voter i votes for candidate A with probability 1 if W i (gA ) > W i (gB ), with probability 1 /2 if
W i (gA ) = W i (gB ), and with probability 0 if W i (gA ) < W i (gB ), we have

0 if W m (gA ) < W m (gB )

1
if W m (gA ) = W m (gB )
pA =
(3.5)
2
1 if W m (gA ) > W m (gB )
Pivotal role of median voter is easy to establish. Recall from (3.4) that g i is decreasing in y i . This fact
and the monotonicity of preferences (3.3) (as y i goes up preferred g goes down) imply that whenever
the median voter prefers one platform over the other, at least half of the electorate agree, hence g m is
the unique Condorcet winner.
Therefore in the subgame perfect equilibrium
0

g m = (H 1 ) (

ym
)
y

(3.6)

Note that for skewed to the right distributions equilibrium policy implies overspending relative to the
utilitarian benchmark g m > g .
One of the (testable) predictions of the model is that larger governments are associated with a more
skewed income distribution.

1.2

Probabilistic voting models

Probabilistic Voting.
Suppose that the population consists of three distinct groups J {R, M, P } representing the rich, the
middle class, and the poor, respectively.
Similarly as above
W J (g) = H(g) +

yJ
(y g)
y

J
Everyone in group
y R > y M > y P . The population share of each group
P JJ has the same income
P y Jwith
J
J
is , with J = 1, therefore y = J y .

Voter i in group J prefers candidate A if

W J (gA ) > W J (gB ) + iJ +

(3.7)

where i,J U [ 21 j , 21 j ] (uniform distribution on interval [ 21 j , 21 j ]) can be interpreted as is

1
1
individual ideological bias toward candidate B and U [ 2
, 2
] can be interpreted as the average
relative popularity of candidate B in the whole population. The densities of the distributions above
are J and , respectively.
The timing is as follows:
The two candidates simultaneously and noncooperatively announce their electoral platforms: gA
and gB . They know the voters preferences, and the distributions, but not their realizations (note
that while in case of i,J the law of large numbers works it is not the case for , which is uncertain).
The actual values of and i,J are realized.
Elections are held in which voters choose between two candidates.
The elected candidate implements her policy platform.
3

 The swing voter in group J, by definition, is indifferent between two parties, therefore hers i,J denoted
as J is equal to
J = W J (gA ) W J (gB )
(3.8)
and all voters with i,J J prefer party A. Therefore in group J the mass of agents J ( J + 21J )
votes for candidate A. Recall that the density in each group is J , thus the probability vote share of
R J
candidate A in each group is P r( i,J J ) = 1 J di = J ( J + 21J ). And candidate A vote
2J

share is the sum of masses across the J groups

A =

J J ( J +

1 X J J J
1
)= +

J
2
2
J

Note that J depends on therefore A is a random variable.

Given(3.8) we get
pA

1
1 X J J J
1
} = Pr{ +
}
2
2
2

Pr{A

X
Pr{
J J J 0}

X
Pr{
J J [W J (gA ) W J (gB ) ] 0}

X
X
Pr{
J J [W J (gA ) W J (gB )]
J J 0}

X
X
Pr{
J J [W J (gA ) W J (gB )]
J J }

1X J J J
Pr{
[W (gA ) W J (gB )]}

where

1
1
, 2
] and has density
J J . Next we use the fact that U [ 2

Z
pA

J J [W J (gA )W J (gB )]

=
1
2

=
=

1
1X J J J
[W (gA ) W J (gB )] (
)]

2
J
1 X J J J
+
[W (gA ) W J (gB )]
2

(3.9)

Probability becomes smooth function of the distance between two platforms (there is no kink).
In unique equilibrium both candidates announce exactly the same platform. Note that
pB

1 X J J J

[W (gA ) W J (gB )]
2

1 pA = 1

1 X J J J
+
[W (gB ) W J (gA )]
2

Therefore both agents share the same problems. Recall payoff of player A is pA R and of player B is
pB R = (1 pA )R.
Note while choosing platform each party takes the policy of the other party as given therefore each
party maximizes something similar to social welfare function but with weights J J instead of J .
The higher J the more homogeneous group J is. The more homogeneous group the more votes party
gets by tilting its policy towards this group.
4

 To formally obtain optimal policy take the derivative of pA R w.r.t. gA (using 3.8 and W J (g) =
J
H(g) + yy (y g)) to get
0
X J J yJ
R
(
+ H (g)) = 0

y
J

Solving w.r.t. g we get

0

H (g)

J J

J J y i

J J (

g
where y =

yi
)
y

0
y
(H )1 ( )
y

(3.10)

/ and superscript S stands for swing voter equilibrium.

The main result is that the more swing voters a given group has (the more switches with small change
in policy) the more policy is tilted towards this group.
Lobbying can additionally skew the selection process towards lobbying groups (later).
Exercise #1
1. Suppose that there are two parties A and B offering policy platforms, respectively, qA and qB . Voter i
2
has preferences over policy q given by W i (qA ) = 100 + qA 12 qA
and preferences over policy qB given
1 2
i
i
i
by W (qB ) + + = 100 qB + 2 qB + + . Moreover, i is uniformly distributed on interval
1
1
1
1
[ 2
, 2
], where = 2, and that is drawn from the uniform distribution on [ 2
, 2
], = 2. The
i
distributions are common knowledge, but only agent i observes his own parameter . The timing is
as in the lecture on probabilistic voting.
(a) Find A .
(b) Find pA .
(c) Which platform is selected by politicians? Which one is implemented?
(d) Discuss your results.
Lobbying
Consider the model from the previous section, but assume J = , for all J.
From (3.10) it implies that in the pure swing-voter model equilibrium policy is socially optimal.
We extend the probabilistic voting model to encompass campaign contributions by interest groups (as
in Baron, 1994).
We assume that groups may be organized in a lobby; and then have the capacity to contribute to
campaign of either of two candidates. Denote the contribution per member of group J to candidate P
(in cash or in kind) as CPJ 0 and total contributions collected by P as
X
CP =
OJ J CPJ
(3.11)
J

where OJ takes a value of one if group J is organized and zero otherwise.

Contributions are made (simultaneously by all lobbies) after parties have announced their platforms,
but before the elections and before is realize.
Now equation average popularity , given previously by (3.7) has the following form
= + h(CB CA )
1
1
where U [ 2
, 2
].

(3.12)

 The swing voter in group J is given by

J = W J (gA ) W J (gB ) + h(CA CB )
and in the similar way as in the previous section, using J = for all J, we get
pA =

1
+ [W (gA ) W (gB ) + h(CA CB )]
2

(3.13)

P
where W (gA ) = J J W J (gA ) is the utilitarian social welfare function and the last term reflects the
influence of campaign spending.
Next we show how groups determine their campaign contributions. Each group maximizes the expected
utility of its members minus the cost of contributions (note: computational mistake in textbook need
to modify to get (3.15))
1
J 2
J 2
) + (J CB
) ]
pA J W J (gA ) + (1 pA )J W J (gB ) [(J CA
2

(3.14)

where the last term represents quadratic cost of contributions (assumption). Note ideology plays no
J
role here. Differentiating w.r.t. CA
we get (recall nonegativity constraint)
pA J
J
(W J (gA ) W J (gB )) (J )2 CA
0
J
CA
computing form (3.13)
pA
= hJ
J
CA
and substituting we get
J
h(W J (gA ) W J (gB )) CA
0

Therefore
J
CA
J
CB

=
=

max[0, h(W J (gA ) W J (gB ))]

J

(3.15)

max[0, h(W (gB ) W (gA ))]

where the second term is derived analogously.

Note that contributions go to the party that offers highest utility and never to more than one party.
Next we derive the choice of optimal policy platform by each party. Party A while choosing their
platform maximizes (taking gB as given) (3.13)
1
pA R = R[ + [W (gA ) W (gB ) + h(CA CB )]]
2
and since the party knows that contributions are given out according to (3.15), using (3.11) we substitute it above to get (note also that R is a constant therefore it will cancel out anyway, so we may as
well get rid of it now)
X
1
J
+ [W (gA ) W (gB ) + h(
O J J CA
CB )]
2
J

Note that we are assuming that given gB party A will offer gA such that W J (gA ) W J (gB ) 0 and
J
therefore we substitute CA
= h(W J (gA ) W J (gB )) and CB = 0
X
1
+ [W (gA ) W (gB ) + h(
OJ J h(W J (gA ) W J (gB )))]
2
J

Rearranging
X
X
1
+ {
J [W J (gA ) W J (gB )] +
hOJ J h[W J (gA ) W J (gB )]}
2
J

X
1 X J
+
[W J (gA ) W J (gB )] +
OJ J 2 h2 [W J (gA ) W J (gB )]
2
J

1 X J
+
( + OJ 2 h2 )[W J (gA ) W J (gB )]
2

(3.16)

Note that the problem is symmetric therefore the party B maximizes analogous expression.
J
J
First note that if,
P for all J,O = 0 or for all J, O = 1 the above expression becomes equivalent to
social optimum J J W J (g) (constant in front of the expression does not matter for the derivative).

But, if only some groups are organized the weight of this groups is higher the policy becomes tilted
J
towards them. Next we substitute W J (g) = H(g) + yy (y g) into (3.16) and then differentiate w.r.t.
gA
X
yJ
J ( + OJ 2 h2 )[H(gA ) +
(y gA ) W J (gB )]
y
J

J ( + OJ 2 h2 )[H 0 (gA )

H 0 (gA )

J ( + OJ 2 h2 ) =

yJ
]=0
y

J ( + OJ 2 h2 )

yJ
y

P
1 J J ( + OJ 2 h2 )y J
P J
H 0 (gA ) =
J 2 2
y
J ( + O h )
0
y
g L = (H )1 ( )
y

(3.17)

where L stands for lobbying equilibrium and

P J
J
2 J
J (1 + O h )y
y = P
J
J
2
J (1 + O h )
Therefore organized groups receive greater weights and equilibrium government expenditure are tilted
in their favor.
If rich people are organized government expenditure are smaller than optimal. In such a case the bigger
impact of contributions on probability of winning, denoted as h, the smaller government spending.
Groups that can organize themselves have more influence on policy than nonorganized ones (point
made by Olson, 1965).
Also, interestingly, since equilibrium is symmetric, from (3.15) there are no contributions in equilibrium
(or they are equal zero).
Nonetheless, Holsey and Borcherding (1997) argue that empirical work failed to find robust evidence
of the tight link between interest group activity and the size of government.
Exercise #2
1. Suppose that there are two parties A and B offering policy platforms, respectively, qA and qB . Suppose
instead that there are two groups of voters J {L, R} and that the voter in group J has preferences over
2
policy q given by W J (qA ) = 100+qA J qA
and preferences over policy qB given by W J (qB )+ iJ + =
2
100 qB + J qB
+ iJ + . Moreover, iJ is uniformly distributed on interval [ 21J , 21J ], where J = 2
1
1
for all J, and that is drawn from the uniform distribution on [ 2
, 2
], = 2. The distributions are
i
common knowledge, but only agent i observes his own parameter . The timing is as in the lecture on
probabilistic voting. Assume that the society is split in half L = R = 21 and that ( L , R ) = ( 12 , 1)
(note that L likes higher q therefore we call her left wing voter). Suppose that right wing group can
organize and offer contributions CPR to political parties at a cost h(CPR )2 where h = 1.
7

(a) Find optimal policy for each group.

(b) Find A and pA .
(c) Find formulas for optimal contributions.
(d) Which platform is selected by politicians? Which one is implemented? What is the value of
contributions in equilibrium.
(e) Suppose neither group were able to organize themselves, how would your answer change.
(f) Find optimal policy.
(g) Discuss your results.

1.3

Concluding Remarks

Summary
First, we analyzed the Downsian Electoral Competition and Median Voter Equilibrium.
Next, we added probabilistic voting to make it more interesting (and we noted that lobbing can
additionally skew the outcome).
Finally, we showed how the political process can be affected by organized lobbies.