On the ability of the current government to influence its successor’s actions : a note

Abstract

An incumbent policy-maker can influence his successors' actions if current policies alter a state variabel that determines the opportunity set of the successor. Existing literature suggests that public debt is an important variabel in this context. This note introduces an alternative mechanism based on the well-known habit formation hyphotesis, which has been utilized in the literatures on consumption and asset pricing. Invoking habit formation in the voters' preferences for various public goods, we obtain a direct and intuitive link between the current government's choices regarding the composition of public spending and the succesors choices in later periods. The relevant state variables in our set-up are simply the habit levels. Given specific assumptions about the dynamic formation of these habit levels, it turns out that the incumbent government may use the habit formation mechanism strategically.