Economic Policy, Model Uncertainty and Elections
Economics & Politics p. 85- 103
We analyse a game theoretical model in which policy makers have superior knowledge about the working of the economy relative to voters. We show that parties increase their chances of reelection by basing their policies on the model that best fits in with their preferences. Moreover, we show that if parties care much about holding office, they may deliberately base their policies on a model that is electorally attractive, even if this model does not describe the working of the economy correctly. Our paper provides an explanation for the observation that different political parties subscribe to different economic philosophies.