No. 7/2007
HABIT FORMATION, STRATEGIC EXTREMISM AND
DEBT POLICY
Egil Matsen and Øystein Thøgersen
Abstract:
We suggest a probabilistic voting model where voters’ preferences
for alternative public goods display habit formation. Current policies
determine habit levels and in turn the future preferences of the voters.
This allows the incumbent to act strategically in order to influence the
probability of re-election. Comparing to a benchmark case of a certain
re-election, we demonstrate that the incumbent’s optimal policy
features both a more polarized allocation between the alternative public
goods and a debt bias.
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