Two Roles for Elections: Disciplining the Incumbent and Selecting a Competent Candidate

This paper presents a political economy model in which the voterswant to control moral hazard on the part of the incumbent andselect a competent candidate to be in office. We focus on electionswhich take place repeatedly as the basic disciplinary and screeningmechanism. It is shown that incomplete information of the votersabout the (economic) competence of the incumbent helps to overcomethe lame duck effect of a government with foreseeable end. Asecond finding is that economic performance strongly influences thereelection of the incumbent. In particular, in (stationary perfectBayesian) equilibrium, if economic performance is bad, theincumbent will not be reelected. We also prove that having thepossibility of reelecting a government increases the welfare of thevoters to the no reelection benchmark.