A STRUCTURAL MODEL OF ELECTORAL ACCOUNTABILITY

• Published date: 01 May 2019
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/iere.12361

INTERNATIONAL ECONOMIC REVIEW

Vol. 60, No. 2, May 2019 DOI: 10.1111/iere.12361

A STRUCTURAL MODEL OF ELECTORAL ACCOUNTABILITY∗

BYS. BORA ˘

GAN ARUOBA,ALLAN DRAZEN,AND RAZVAN VLAICU 1

University of Maryland, U.S.A.; University of Maryland, U.S.A., NBER,U.S.A.; and CEPR,

U.K.; Inter-American Development Bank, U.S.A.

This article proposes a structural approach to measuring the effects of electoral accountability. We estimate

a political agency model with imperfect information in order to identify and quantify discipline and selection

effects, using data on U.S. governors. We find that the possibility of reelection provides a significant incentive

for incumbents to exert effort, that is, a disciplining effect. We also find a positive but weaker selection effect.

According to our model, the widely used two-term regime improves voter welfare by 4.2% compared to a

one-term regime, and better voter information about the effort of the governors would further increase voter

welfarebyupto0.5%.

1. INTRODUCTION

In a democracy, elections are meant to make policymakers accountable for their perfor-

mance. When elected officials are judged by the outcomes they produce, elections can improve

policymaker performance in two key ways. They give incumbents who want to be reelected in-

centives to exert effort to improve outcomes, thus disciplining poor performance (Barro, 1973,

considered this in a full information model, and Bernhardt and Ingberman, 1985, and Ferejohn,

1986, with asymmetric information about candidates). Elections also serve a selection function

by screening out low performers (Banks and Sundaram, 1993; Fearon, 1999; Smart and Sturm,

2013; Duggan and Martinelli, 2015).2,3

One may then ask how effective elections are in performing these functions. From an empirical

perspective, this is a question of how to measure the disciplining and selection effects of the

electoral mechanism. Many papers, as discussed in the next section, have adopted a reduced-

form approach to try to measure the effects of elections on policymaker performance. To

identify the effects of elections they rely on variation in electoral incentives induced by term

limits, either across electoral terms, for example, comparing reelection-eligible to lame-duck

∗Manuscript received March 2017; revised May 2018.

1The authors thank Jim Alt, Tim Besley, and Shanna Rose for their assistance with data and general feedback,

Ethan Kaplan, Nuno Limao, Emel Filiz ¨

Ozbay, and seminar participants at University of Maryland, Paris School of

Economics, LSE, Bocconi University, ´

Ecole Polytechnique, Northwestern University, Wallis Institute Conference,

LACEA Annual Meeeting, SEA Annual Meeting, and IDB Research Department for useful comments, and Seth

Wechsler, Pablo Cuba-Borda, and Camilo Morales-Jimenez for research assistance at various stages of the project.

Please address correspondence to: S. Bora˘

gan Aruoba, University of Maryland, College Park, MD 20742. Phone: 301

405-3508. E-mail: aruoba@econ.umd.edu.

2There is a large empirical literature on the effect of elections on outcomes, termed political economic cycles. Brender

and Drazen (2005, 2008) summarize key findings for political budget cycles. Welfare implications of opportunistic

policymaker behavior are studied by Maskin and Tirole (2004), among others. Discipline and selection effects may also

hold for indirectly elected policymakers, as discussed in Vlaicu and Whalley (2016).

3One may note that Fearon (1999) has been interpreted as arguing that the electoral mechanism cannot be used

both to select over heterogeneous politicians and to sanction low effort. The argument simply put is that when voters

are forward-looking, they will always vote for the candidate who is expected to deliver higher utility, making a purely

retrospective voting rule to sanction poor performance nonoptimal. However, when politician type is whether they are

subject to moral hazard or not, as it is in this model, then selection and sanctioning bad behavior are fully consistent.

(See also Banks and Sundaram, 1993).

517

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(2018) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social

and Economic Research Association

518 ARUOBA,DRAZEN,AND VLAICU

officials, or across electoral regimes, for example, comparing officials serving under shorter and

longer term limit regimes.

In this article, we propose a structural approach to measuring the discipline and selection

effects of elections. We set out a political agency model of electoral accountability that is

predicated on the notion that voters are imperfectly informed principals using the electoral

mechanism to improve the performance of elected policymakers as their agents. We then es-

timate the parameters of this model with adverse selection and moral hazard to quantitatively

assess the importance of discipline and selection. We also perform several counterfactual exer-

cises to study the welfare implications of allowing the possibility of reelection and of improving

voter information.

Our model mimics those U.S. states where governors have a two-term limit in office, currently

the most prevalent regime. In the model, governors are of two types: “good,” who have intrinsic

incentives to exert high effort, and “bad,” who would exert high effort only in the presence

of external incentives to do so, such as the possibility of another term in office. Neither the

effort level chosen by governors nor their type are observable to voters. Instead, they observe

incumbent performance, an outcome that depends stochastically on effort. Voters use observed

performance to decide whether or not to reelect the incumbent governor. Another difference

from the literature that tries to identify discipline and selection from incumbent performance

is that we use a different measure of governor performance. We provide evidence that it

captures more comprehensively voter welfare compared to individual policy measures or policy

outcomes.

Based on our structural parameters, we estimate outcomes that would result in the absence

of electoral accountability, that is, where there is no possibility of reelection. On the basis of

this, we can measure how much electoral accountability improves outcomes, as well as whether

improvements come mainly through discipline or through selection. This proves to be relevant

since small net effects of electoral accountability in a reduced-form analysis (such as in our

replication in Section 2 of a typical reduced-form analysis using our performance data) may

hide fairly large and distinct discipline and selection effects. Disentangling these effects is

thus crucial in addressing the issue of electoral accountability in the political agency model, a

workhorse model in political economy.

The structural model also allows us to perform counterfactual experiments to assess the

welfare effects of alternative settings, where governor incentives and voter information differ.

Using parameters estimated from governors limited to two terms, we estimate outcomes under

these alternative conditions (such as a one-term limit, varying the cost of exerting effort, or one

where the voters observe an imperfect signal about governor effort), taking into account that

both the voters and the governors in the economy adjust their equilibrium behavior accordingly.

The assumption of invariance of structural parameters to the electoral environment is essential

in avoiding the Lucas (1976) critique.

Our main findings are as follows. We find that 52% of governors are of the good type that

exerts high effort independent of which term they are in. The possibility of reelection provides

a significant incentive for some bad governors to exert high effort in their first term in order

to increase their chances of reelection. Compared to the case with a one-term limit, allowing a

second term leads 27% of bad governors to exert high effort in their first term of office, implying

a 13 percentage point increase in the fraction of all governors who exert high effort in their

first term. Discipline would be stronger were it not for a stochastic relation between effort and

performance (high effort does not always lead to high performance), as well as an exogenous

random component to election outcomes, that is, success or failure in reelection uncorrelated

with performance. The two-term-limit regime leads to an increase in voter lifetime welfare of

4.2% relative to the case of a one-term limit. About two-thirds of this gain in welfare comes

from the disciplining of bad governors. The remainder comes from the selection effect, that

is, more good governors surviving to the second term because better first-term performance

stochastically signals high effort and hence a higher probability that the governor is of the good

type. The selection effect is reduced by a mimicking effect in that high first-term effort by bad