Vote-Share Contracts and Democracy

Once in office, politicians in parliament enjoy an incumbency advantage; incumbent election rates top the 90-percent mark. Moreover, as is well-documented in the US (e.g. Jacobson 2004), the average victory margins have increased over time. Several explanations have been advanced for the existence of incumbency advantages; some are detrimental to welfare, while others are welfare-improving.

Examples of the former case: The incumbent undertakes actions that are socially costly, such as pork barrels, lobbying for industry-specific regulations or wars1 , but which increase his re-election prospects. The incumbent may also postpone the benefits of his policy actions to the next term, which can make him costly to replace even if his ability is inferior to that of his challengers.

Examples of the latter case: On average, incumbents may have superior qualities to their challengers. The reason is two-fold. Candidates who have won in the past are of higher quality,2 and challengers may be deterred from running against them3 .

It would be useful to have a device that eliminates welfare-reducing incumbency advantages while preserving the welfare-improving ones. Such a device should not, however, interfere with the fundamental values of liberal democracy. We propose vote-share contracts as a way of achieving these objectives. Candidates competing for public office can stipulate a vote-share threshold equal to or above one-half, which they need to reach in order to be re-elected. If the incumbent does not obtain enough votes to reach the vote-share threshold, either his challenger is elected, or a run-off ballot between two new candidates takes place. The commitment of a candidate to a vote-share threshold is called a vote-share contract.

Vote-share thresholds for incumbents have two effects. A higher threshold stimulates greater effort, as the incumbent wants to be reelected. This is socially desirable. A higher vote-share threshold allows only those incumbents of high ability to be reelected, as they will be able to garner enough votes for the purpose. This is socially desirable as long as incumbents with above-average ability are reelected. If the threshold is too high, even incumbents with above-average qualities will be deselected, which is socially undesirable.

A socially optimal vote-share threshold for incumbents balances these effects. With a simple model (Gersbach (2007)) we show that the socially optimal vote-share threshold for incumbents is typically larger than one-half.

A socially optimal vote-share threshold can be set by the public. More interestingly, we allow that candidates compete with vote-share contracts. Then, the majority of voters will elect the candidate who commits to a vote-share threshold that is closer to the socially optimal threshold. As a result, both candidates will commit to the socially optimal vote-share threshold.

Increasing vote-share thresholds can also be used to constrain government debt accumulation. Suppose the government wants to issue debt beyond normal rules. A standard rule, for example, is to constrain public debt financing by government net investment. Possible exceptions are recessions or natural disasters. We suggest using the following correction mechanism when governments have issued debt beyond normal rules: The government can roll over the exceptional debt from year to year, but for this it needs the support of the parliament. The required vote-share threshold is increasing over time, which makes rolling over debt more and more difficult.

Such a rule allows the legislature to determine the timing of fiscal consolidation and also ensures that exceptional debt will eventually be repaid if the limit of the vote-share threshold schedule is set close to the unanimity rule. Moreover, if the same vote-share threshold needs to be applied to situations when the government wants to issue new exceptional debt although past exceptional debt has not yet been repaid, accumulation of exceptional debt is also excluded.

Our proposal is part of a recent strand of literature that proposes supplementing liberal democracy with political contracts4 . Political contracts differ from contracts in the private sector5 in two important respects. First, political contracts are not agreements between two parties, but one-sided written expressions of promises made by politicians, coupled with rewards and sanctions depending on whether these promises are kept. Second, political contracts are subordinated to the rules of liberal democracy, i.e. only contracts that do not interfere with the fundamental values of liberal democracy can become political contracts. The vote-share contracts proposed in this paper represent a new type of political contract.6

Of course, institutional changes may trigger feedback and consequences that are unintended and unknown as yet, both when the change is proposed and when it actually happens. Nevertheless, liberal democracies can certainly afford to explore the potential of vote-share contracts.

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1 See e.g. Rogoff and Sibert (1988), Alesina and Cukierman (1990), Hess and Orphanides (1995, 2001), and Cukierman and Tommasi (1998).

2 See Samuelson (1984), Londregan and Romer (1993), Banks and Sundaram (1998), Zaller (1998), Ashworth (2005), and Diermeier, Keane, and Merlo (2005).

3 See Jacobson and Kernell (1983), Cox and Katz (1996), Stone, Maisel, and Maestas (2004), and Gordon, Huber, and Landa (2007).

4 See e.g. Gersbach (2005), Gersbach and Müller (2006), and Gersbach and Liessem (2007).

5 The corresponding contract theory in the private area is covered, e.g., in Schweizer (1999) and Bolton and Dewatripont (2005).

6 Political contracts already are, or have been, used in some provinces in Canada. And in Germany, the leader of the Liberal Party of Baden-Württemberg, one of the Federal States, suggested that the members of the cabinet should conclude a contract on the aims of the government that would involve a loss of 10 to 30 percent of their salary if those aims were not achieved (Homburger (2005). This proposal has not been implemented yet.