Strategic Transparency and Electoral Pressure

• Author: TORU SUZUKI,LAURA MORETTI
• Date: 01 August 2016
• DOI: http://doi.org/10.1111/jpet.12164
• Published date: 01 August 2016

STRATEGIC TRANSPARENCY AND ELECTORAL PRESSURE

LAURA MORETTI

Central Bank of Ireland

TORU SUZUKI

University of Technology Sydney

Abstract

This paper investigates how an office-motivated incumbent can use

transparency enhancement on public spending to signal his budgetary

management ability and win re-election. We show that, when the in-

cumbent faces a popular challenger, transparency policy can be an ef-

fective signaling device. It is also shown that electoral pressure can have

a nonmonotonic effect on transparency, but a higher electoral pressure

always increases the informativeness of signaling and the voter’s utility.

1. Introduction

Enhancing fiscal transparency has been a central part of the attempts to reform pub-

lic sector governance in many countries since the late 1990s. The debate over the

importance of transparency is not limited to the policy circles, but it has attracted in-

creasing interest among academic researchers.1Even though most of the research sup-

ports the benefit of fiscal transparency, it is not obvious whether an office-motivated

politician has an incentive to enhance transparency. As noted by Alesina and Perotti

(1996), politicians benefit from lack of transparency because it helps to create confu-

sion and ambiguity on the real state of public finance. Moreover, fiscal transparency is

costly for politicians since it forces them to restrain unproductive spending that favors

themselves.

One benefit of fiscal transparency for politicians is to enhance their credibility by

making them accountable and self-disciplined. However, it is not clear whether this can

be a sufficient incentive. In fact, to resolve a fiscal problem, a politician needs to have

an ability to manage spending in addition to being accountable and self-disciplined. In

1See Ferejohn (1999), Milesi-Ferretti (2004), Gavazza and Lizzeri (2009, 2011), and Prat (2005) for a

theoretical analysis; Alt and Lassen (2006a, 2006b), Alt, Lassen, and Shilling (2002), Alt, Lassen, and

Rose (2006) for an empirical investigation of the beneficial effects of transparency.

Laura Moretti, Central Bank of Ireland, P.O. Box 559, Dame Street, Dublin 2, Ireland

(laura.moretti@centralbank.ie). Toru Suzuki, University of Technology Sydney, P.O. Box 123, Broad-

way NSW 2007, Australia (toru.suzuki@uts.edu.au).

We would like to thank two anonymous referees and the associate editor for helpful suggestions. We

are grateful to Christophe Chamley, Guido Friebel, Stefan Gerlach, Marco LiCalzi, Barton Lipman, and

Sigrid R¨

ohrs for helpful comments on previous versions of the paper.

Received March 13, 2015; Accepted March 28, 2015.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (4), 2016, pp. 624–641.

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Strategic Transparency 625

other words, even if an incumbent enhances transparency, he would not be reelected

if voters think that the incumbent has poor budgetary management ability. Then, the

incumbent with low management ability might have no incentive to introduce the costly

transparency policy, as Alesina and Perotti (1996) claim. On the other hand, the incum-

bent who has confidence in managing fiscal problems might introduce the costly trans-

parency policy to signal his budgetary management ability. This paper analyzes whether

an enhancement of transparency on public spending could be explained by a politi-

cian’s intention to signal his budgetary management ability in order to win re-election.

To investigate our question, we study the following signaling model. There is an in-

cumbent who wishes to be re-elected. Each candidate is characterized by two elements.

The first is his budgetary management ability, which is the candidate’s private infor-

mation. A politician with a higher budgetary management ability is able to spend less

to provide the public services that voters expect. The second element is composed of

other political abilities, a diverse set of complementary political abilities such as media-

tion. Voters have different tastes over two abilities and each voter’s taste is characterized

by a parameter that measures the importance of the budgetary management ability rel-

ative to other ability. Thus, the distribution of tastes reflects the importance of fiscal

problems given the state of the economy. The model consists of two periods. In the first

period, the incumbent has to decide whether to introduce the transparency policy that

credibly commits the disclosure of spending at the beginning of the next period. The

transparency policy is costly for him since it restrains unproductive spending that only

benefits him. The level of spending depends not only on the incumbent’s budgetary

management ability but also on unobservable economic shocks. Thus, the incumbent

cannot prove his budgetary management ability by simply disclosing public spending.

We then model public spending as a random variable, which is correlated with his bud-

getary management ability. In the second period, after observing the incumbent’s policy

choice and spending (if it is disclosed), each voter updates her belief about the incum-

bent’s budgetary management ability and casts her vote for either the incumbent or the

challenger. The incumbent wins if he gets the majority of the votes.

First, we analyze the condition under which the transparency policy can be an effec-

tive signaling device, that is, the existence of an “informative equilibrium.” We show that

a high level of electoral pressure is the key determinant to make the transparency policy

an effective signaling device. Suppose the incumbent with a high budgetary manage-

ment ability introduces the transparency policy. When the incumbent faces an unpopu-

lar challenger, the incumbent with a low ability has an incentive to imitate the high type

by taking advantage of the noisiness of the spending level. On the other hand, when the

incumbent faces a popular challenger, the incumbent can win the election only when

the disclosed spending level impresses voters. Thus, the incumbent with a low ability has

no incentive to introduce the costly policy by imitating the high ability type.

Our main interest is to analyze how higher electoral pressure, that is, the pres-

ence of a more popular challenger, affects the probability to enhance transparency and

the equilibrium payoff of voters. First, when we focus on the informative equilibrium,

higher level of electoral pressure decreases the probability to enhance transparency in

the informative equilibrium. Intuitively, when the incumbent faces a more popular chal-

lenger, the incumbent needs to have a higher budgetary management ability to justify

the cost of disclosure. Second, the effect on the median voter’s payoff is somewhat coun-

terintuitive: even though higher electoral pressure decreases the probability to enhance

transparency, it increases the median voter’s payoff in the informative equilibrium. The

basic idea is the following. Higher electoral pressure reduces the probability to enhance

transparency by discouraging the incumbent whose ability is lower than the challenger’s.