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Policy Making with Reputation Concerns∗
Qiang Fu†
National University of Singapore
Ming Li‡
Concordia University and CIREQ
First draft: July 2008
This version: May 2010
Abstract
We study the policy choice of an office-holding politician who
is concerned with the public’s
perception of his capabilities. The politician decides whether
to maintain the status quo or
to conduct a risky reform. The success of the reform depends
critically upon the abilities of
the politician, which is privately known to the politician. The
public observes both his policy
choice and the outcome of the reform, and forms a posterior on
the true ability of the politician.
We show that politicians may engage in socially detrimental
reform in order to be perceived
as more capable. Conservative institutions that thwart reform
may potentially improve social
welfare.
JEL Nos: C72, D72, D82
Keywords: Reform, Reputation, Ability, Conservatism
∗We are grateful to Parimal Bag, Michael Baye, Oliver Board,
Kim-Sau Chung, Rick Harbaugh, Navin
Kartik, Kyungmin Kim, Tilman Klumpp, Jingfeng Lu, Marco
Ottaviani, Ivan Png, Larry Samuelson, Joel
Sobel, and Bernard Yeung for their helpful comments. We
gratefully acknowledge valuable input from
the seminar and conference audiences at the Midwest Economic
Theory Meeting–Fall 2008, the Canadian
Economic Association Meeting–2009, the Far Eastern Meeting of
the Econometric Society–2009, the Montreal
Theory Reading Group, and the Hong Kong University of Science
and Technology. Part of the research was
completed while Fu was a CIREQ visitor, and he is grateful for
the hospitality.†Department of Business Policy, National University
of Singapore, 1 Business Link, SINGAPORE, 117592,
Tel: (65)65163775, Email: [email protected]‡Department of
Economics, Concordia University 1455 Boul.de Maisonneuve O.,
Montreal, QC, H3G
1M8, CANADA, Tel: +1(514)8482424 Ext. 3922, Email:
[email protected].
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1 Introduction
She (Emma) was not much deceived as to her own skill either as
an artist or a
musician, but she was not unwilling to have others deceived, or
sorry to know
her reputation for accomplishment often higher than it
deserved.
Emma, vol. 1, ch. 6, by Jane Austen, English Author
Love of fame brings about eccentricity, and being eccentric
brings danger to
oneself; therefore the sages exhorted against the love of
fame.
Xing xin za yan, Li Bangxian, Chinese Poet
In making decisions and taking action, we are often concerned
about inferences that
people draw about us from our choices and/or their consequences.
To a large extent, our
success, professional or otherwise, is determined by these
inferences, as they shape our rep-
utation. A good reputation not only generates psychological
satisfaction and improves one’s
social status, but also facilitates various tangible gains such
as better opportunities in career
development.
Reputation or career concerns form one important dimension of
the informal incentives
that motivate economic agents to carry out various activities.
They loom large, and perhaps
more conspicuously, in the public sector or in non-profit
organizations, where formal contracts
based on explicit performance-based incentives are usually rare.
There are many examples
that illustrate the ubiquitous and non-trivial influence of
reputation. The reputation of a
technocrat’s professional competence often determines his
ability to either reach a higher
rung on the hierarchical ladder, or resume an alternative career
in the private sector after
his term of service is over. A bureaucrat in the Securities and
Exchange Commission, for
instance, often seeks a lucrative job offer from private
financial firms after he leaves office.
Career politics provide more salient examples of this. As Irving
Rein, Philip Kotler, and
Martin Stoller (1987) state, politics is an “image intensive
sector,” where “image building
and transformation truly dominate.” The likelihood of a
politician being re-elected may
depend to a large extent on the public’s perception of his
capabilities. For instance, in the
aftermath of the economic turmoil, commentators deemed Gordon
Brown to have lost his
“reputation for economic competence” “through a combination of
appallingly bad luck and
even worse misjudgment,”1 which would eventually cost him his
premiership. Alternatively,
1Source: Fraser Neslon, “Brown’s Reputation for Economic
Competence Has Gone. The Tories Should
Seize the Chance.” http://www.spectator.co.uk, January 23rd,
2008.
2
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a politician in office may simply be concerned about how the
public evaluates his legacy
when he steps down.
Due to the strength and prevalence of such informal incentives,
it is not unusual for policy
makers to take action to enhance their reputation. For instance,
Frederick Sheehan (2009)
comments that Alan Greenspan deliberately built up his own
reputation of competence
in designing monetary policy, and went to great lengths to
protect his reputation. In the
current paper, we identify one particular context in which such
concerns affect the behaviour
of individuals – they may take on risky or innovative
initiatives whose success depends on
their capabilities, so as to manipulate the public’s perception
of their talents, even though
they know that they have low capabilities and hence a poor
chance of success. As Tereza
Capelos (2005) states, “political actors often engage in
controversial activities that challenge
their reputation.” She points out that politicians risk losing
their support “after showing
inexperience, or wrong judgment.” Our analysis predicts that
undertaking risky actions can
be interpreted as attempts on the part of a politician to
protect his reputation.
In our model, an office-holding politician decides whether to
adopt a reform proposal or
to maintain the status quo. The politician’s capability level
can be either high or low, and
is privately known to only himself. If the politician chooses to
maintain the status quo, then
the performance of the policy does not depend on his
capabilities. If the politician chooses
reform, however, the performance depends on the inherent merit
of the reform proposal,
as well as the implementation by the politician. A
high-capability politician is better at
implementing reform, and successful reform is more likely in
this case.2 The public observes
both the policy choice of the politician and the resultant
performance. The public then
forms an assessment of the capabilities of the politician. The
politician cares only about the
public’s perception of his capabilities.
Throughout this paper, the decision maker in our model is
referred to as a “politician,”
and the risky option he takes is referred to as “reform.”
However, our analysis may encompass
a variety of environments, such as a judge who has to decide
whether or not to exercise his
power to strike down a law, a prosecutor who has to decide
whether or not to file charges
against a crime suspect, a CEO who has to decide whether or not
to implement an expansion
plan, or even a doctoral candidate who must decide whether or
not to pursue a cutting-edge
research project.
The politician’s competence is reflected by his ability to
gather information and to make
2This assumption can be related to the concept of “state
capacity,” which is proposed by Theda
Skocpol (1985). She argues that ambitious reform attempts often
fail because bureaucrats usually lack
the required competence to administer their reform.
3
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sensible decisions in situations of uncertainty. The policy
performance is independent of the
politician’s capabilities when the status quo is maintained: a
continuation of the existing
policy minimizes uncertainty, and allows the politician to
borrow from past experience and to
utilize existing information. In contrast, when the politician
abandons the status quo, more
uncertainty arises. The reform succeeds only if the politician
chooses appropriate action
in each contingency. For instance, if the US President pushes
through a fiscal stimulus
plan, which may help rescue the economy out of a recession, the
ultimate success of the
plan depends on how funds are allocated to optimize its
effectiveness. In another example,
although the acquisition of Compaq by Hewlett-Packard has proven
its merit over the years,
it is a widely held belief that the initial fiasco was due to
the flawed management of the
merger by its CEO at the time, Carly Fiorina. The politician is
more likely to implement
a successful reform if he has a superior ability to gather
information in the presence of
uncertainty.
There is a continuum of Perfect Bayesian equilibria in this
game. Each equilibrium is
characterized by a distinct cutoff, such that the high-type
politician reforms if and only if
the reform proposal carries a potential value that exceeds the
cutoff. We find that there
exists no fully-separating equilibrium. A high-type politician
is always “eager” to reveal
more information by undertaking reform: he reforms with
probability one once the value of
the available proposal exceeds the prevailing cutoff in the
equilibrium. The low type mimics
his high-type counterpart with a positive probability. Although
the reform undertaken by
a low type fails with a higher probability, his reputation
concerns “force” him to do so,
because he would otherwise suffer from a more unfavourable
assessment. Our analysis yields
a number of interesting observations.
• Pressure to prove oneself. The probability of reform by the
low type decreaseswith the public’s initial assessment of the
likelihood that the politician is capable. For
the low type, a greater gain in reputation can be expected from
reform if the initial
assessment is less favourable. Due to this effect, reform can be
predicted to occur less
often in the equilibrium when the initial assessment of the
politician is more favourable
(that is, when the politician is more likely to be a high type),
even without knowing
his true type. The decreased frequency of reform by the low type
more than offsets the
increased frequency of reform due to the higher likelihood of
the high type (the high
type reforms with probability one in equilibrium if he reforms
at all).
We interpret these results as an indication of the pressure to
prove oneself. This
phenomenon is present in the intellectual, political, and social
aspects of our lives.
4
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Young or less established individuals are usually seen as being
more progressive and
opposed to the status quo, in contrast to senior or more
established individuals, who
usually behave more prudently and conservatively. A famous
example is the “‘Young’
Turks” reform movement, which agitated against the Ottoman
Empire in the early
20th century, thus building a rich tradition of dissent and
paving the foundation of
modern Turkey.3 The term “‘Young’ Turks” today represents
progressive individuals
who are eager to bring about widespread change.
• Tough act to follow. The higher the capability differential
between the high typeand the low type, the less likely is the low
type to undertake reform. To put it simply,
the widened gap makes successful mimicry more difficult. This
effect causes the low
type to reform less often in order to avoid failure.
• Thwarted good reforms. We consider the design of the optimal
(welfare-maximizing)constitution or bureaucratic rule that
restricts the discretion of the politician. Assume
that a legislature enforces a threshold rule – it prohibits
reform unless the value of
the reform proposal exceeds a threshold. A higher, or more
conservative, threshold
has two competing effects. First, it discourages a
low-capability politician from un-
dertaking detrimental reform. However, it also prevents a
high-capability politician
from undertaking beneficial reform. We find that the social
optimum requires proper
“conservatism”: the optimal threshold rule must thwart otherwise
ex ante beneficial
reform. Our analysis on the optimal institution thus lends
support to the bureaucratic
rules in various organizations that restrict the discretionary
power of politicians or
bureaucrats in carrying out risky activities.4 It also provides
an alternative rationale
for the often observed organizational resistance to policy
reform and the widely dis-
cussed bias towards the status quo. As pointed out by Raquel
Fernandez and Dani
Rodrik (1991), “one of the fundamental questions in political
economy” has been why,
ex ante, governments fail to carry out ex post
efficiency-enhancing reform.
• Opportunities hurt and “optimism” requires more conservatism.
In an envi-3The Young Turks originated from the secret societies of
progressive and modernist university students
and military cadets, who advocated reformation of the Ottoman
administration and promoted social and
political changes against the monarchy. The Young Turk
revolution re-established the constitutional era in
1908. As a nationalist party, Young Turks dominated the domestic
politics of Turkey thereafter for an entire
decade.4For instance, in the debate on judicial restraint or
judicial activism, one popular argument is to encourage
judges to refrain from exercising their power to strike existing
laws.
5
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ronment in which good reform proposals are more likely to
emerge, it is not necessarily
true that social welfare will be higher. On the one hand,
society gains more from
the efficient reform undertaken by the high-type. On the other
hand, it “forces” the
low type to reform more often, as the choice to forego reform
will be more likely to
be attributed by the public to the politician’s lack of ability,
instead of to the lack
of opportunities (i.e. low-valued reform proposals are
realized). A more favourable
environment may paradoxically lead to a decrease in social
welfare. This observation
compels us to study how the welfare-maximizing institutional
rule should respond to
changes in the environment. Under plausible conditions, we find
that a more favourable
environment can lead to a more conservative bureaucratic
rule.
In the rest of this section, we discuss the link between our
paper and the relevant litera-
ture. In Section 2, we set up the model. In Section 3, we
characterize equilibria of the model
and present comparative statics of relevant environmental
factors. In Section 4, we discuss
the welfare implications of our equilibrium results and consider
the issue of institution design.
In Section 5, we conclude. All proofs are collated in the
Appendix.
Relationship to the Literature
The notion of career or reputation concerns can be traced back
to the pathbreaking work of
Bengt Holmström (1982, 1999). An enormous amount of scholarly
effort has been devoted
to exploring the incentive effects of reputation or career
concerns in a wide array of envi-
ronments, including corporate decision making (e.g. Bengt
Holmström and Joan E. Ricart i
Costa 1986, Jeffery Zwiebel 1995, and Adam Brandenburger and Ben
Polak 1996), economic
agents’ effort supply (e.g. Holmström 1999 and Alberto Alesina
and Guido Tabellini 2007),
and experts’ strategic advising activities (e.g. Stephen Morris
2001 and Marco Ottaviani
and Peter Norman Sørensen 2006). The literature reveals in
various contexts that concerns
regarding public or market perceptions distort managerial
decision making, and lead man-
agers to ignore their own useful information and instead, to
strategically manipulate the
belief of the public or the market.5
Our paper explores (1) the politician’s incentives to take on
risky actions, which signal
his competence; and (2) the optimal (welfare-maximizing)
bureaucratic rule that restricts
the politician’s discretion when he is subject to reputation
concerns.
5For instance, Brandenburger and Polak (1996), David S.
Scharfstein and Jeremy C. Stein (1990), and
Ottaviani and Sørensen (2006) all share this feature.
6
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Hence, our paper belongs to the strand of career concern
literature that focuses on agents’
incentives to undertake a risky project. The setup of our paper
is a variation of the example
introduced in Section 3.2 of Holmström’s (1999) seminal paper.
The common feature is that
the politician’s (decision maker’s) talent is only relevant when
the reform (risky project)
is undertaken. Hence, more information can be revealed when the
risky activity is carried
out.6 Two features distinguish our setup from Holmström’s
(1999): first, we assume the
politician’s talent is his private information, while he assumes
symmetric information and
symmetric information updating; second, in our model, the
probability of success for each
type is common knowledge, while in Holmström’s (1999), it is
the private information of the
agent. As a consequence, in our model, the choice to undertake
reform can be used as a
signal of talent by the politician, which is not possible in
Holmström’s setup.
Holmström and Ricart i Costa (1986) study managers’ incentives
to make a new invest-
ment when the manager is subject to career concerns. Similar to
Holmström’s (1999) setup,
the type of the manager is unknown to all players. Benjamin E.
Hermalin (1993) shows that a
risk-averse agent with career concerns may have the incentive to
choose a more risky project,
when the risk levels of projects are commonly known to both the
principal and the agent.
However, in his model, a risky project is a worse indicator of
the agent’s talent, while in our
model, reform reveals more information. Gary Biglaiser and
Claudio Mezzetti (1997) study
in a symmetric-information model politicians’ incentives to
implement major new projects.
Voters evaluate the incumbent’s ability based on his performance
in the project. They show
that the incumbents’ project choices can be either too radical
or too conservative, depending
on the bias of the median voters. They also briefly discuss an
extension where the incum-
bent possesses private information about his type and show that
full separation is impossible.
However, they do not fully characterize all the equilibria in
that case. Zwiebel (1995) also
explores how reputation concerns moderate a manager’s incentive
to undertake risky innova-
tion. He shows that managers with intermediate capabilities may
resist innovation that can
be beneficial to the firm. In the setting of Zwiebel (1995), the
manager’s innovative action is
unobservable. Hence, the setting of Zwiebel (1995) does not
involve costly signalling action
on the part of the decision maker. We also arrive at the
opposite conclusion that there can
be too much reform when the politician cares about his
reputation.7
6The inclusion of a “status quo” option that does not reveal the
right action to take for the risky
option is also present in Amal Sanyal and Kunal Sengupta’s
(2006) paper. They study a game of strategic
communication in which the expert is career-concerned in the
sense of Ottaviani and Sørensen (2006).7Robert A. J. Dur (2001) and
Peter Howitt and Ronald Wintrobe (1995) also explore scenarios in
which
there is too little change in policy.
7
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Our study includes flavours from both the literature of
signalling and that of career
concerns, which places it in the company of a handful of other
studies, including the no-
table examples of Canice Prendergast and Lars Stole (1996),
Gilat Levy (2007), and Wei Li
(2007).8 In a recent paper, Kim-Sau Chung and Péter Esö (2008)
build a model in which
a worker chooses a task to both signal his capabilities to
potential employers and learn
about his capabilities himself, as only he has imperfect
knowledge of it. They assume that
the more difficult task is a worse (less informative) device for
assessing the capability of a
worker; meanwhile in our setting, undertaking the more difficult
task (reform) allows for
more information to be revealed.
Our work is related to that of Sumon Majumdar and Sharun W.
Mukand (2004) and
Guido Suurmond, Otto H. Swank, and Bauke Visser (2004), as both
sets of authors consider
the incentives of agents in the public sector to undertake risky
projects, which signal their
types. Majumdar and Mukand (2004) study the dynamic incentives
of a government within
an election cycle and its policy persistence. The government can
be either too radical or
too conservative in equilibrium. Suurmond, Swank, and Visser
(2004) contend that the
presence of career concerns can be socially beneficial, as it
can encourage a smart agent
to expend more effort in gathering information. In both studies,
the performance of the
risky project can be depicted by a binary indicator (success or
failure). The likelihood of
its success is pre-determined while a more capable agent can
discover the pre-determined
“suitability” of the project more precisely. In contrast, we
assume that (1) the performance
of reform is a continuous measure, depending on the quality of
both the project per se and
the implementation by the politician; (2) the politician’s
ability determines the quality of ex
post implementation; and (3) the quality of the project is
random. This setting allows us to
study the issue of institutional design concerning the proper
level of tolerance for reform.
Our paper is also closely related to a simultaneous and
independent paper by Ying
Chen (2010). She analyzes a model in which an agent chooses
between a risky project,
whose payoff to a principal is uncertain, and a safe project,
whose payoff to the principal
is constant. Chen (2010) also assumes that the likelihood of
success of the risky project
depends on the agent’s ability. Our paper and Chen’s (2010) are
different from each other
in a few respects. First, in the setup of Chen (2010), the
likelihood of success also depends
on a random variable, whose realization is observable only to
the agent, while the principal’s
8Prendergast and Stole (1996) argue that career concerns induce
young investors to overreact to new
information they receive, so as to signal that they are fast
learners. Wei Li (2007) makes a similar point in
the case of experts providing advice to decision makers. We
discuss Levy’s work at the end of the literature
discussion.
8
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payoffs from success or failure of the risky project are
prefixed. In contrast, in our model,
the public’s payoffs from a successful or failed reform are
dependent on a random variable,
whereas the success and failure probabilities are affected by
the politician’s ability alone.
Second, in Chen’s (2010) model, even if the risky project fails,
the agent’s reputation is still
higher than that from choosing the safe project.9 In our model,
the politician’s reputation
from a failed reform is lower than that from choosing the status
quo. Third and the most
important, Chen (2010) has a different focus than we do. She
shows that the agent takes
excessive/inadequate risks when he does/does not know his own
type. In contrast, we focus
on a setting in which the politician knows his type. In addition
to identifying the problem
of a politician undertaking excess reform, we also study the
impact of various environmental
factors on the politician’s risk taking behaviour and the design
of optimal institution that
remedies this problem.
Our analysis of optimal institution design in the presence of
reputation concerns is con-
ceptually related to that in a small number of other papers,
which study the ramifications of
various institutions in career concerns models. Andrea Prat
(2005) argues that transparency
in an organization may hurt as the agent may take revealed
action to influence the princi-
pal’s posterior instead of seeking the best interests of the
organization. Gilat Levy (2007)
shows that in a committee of voters with career concerns,
radical actions are more likely
to be accepted when the voting process is transparent. To our
knowledge, our paper might
be one of the first to explicitly investigate an institutional
remedy for inefficient risk taking
when the decision maker has reputation concerns. Our result that
restrictions on changes to
the status quo could be welfare-improving complements other
justifications of institutional
conservatism, for example, those offered by Li, Hao (2001) and
Young K. Kwon (2005). Our
analysis suggests that institutional barriers (bureaucracy) that
limit the amount of discre-
tion that the decision maker can exercise may be
welfare-enhancing. Our paper echoes the
conclusion of Jean Tirole (1986) in this respect.
2 Setup
A risk-neutral politician makes a policy choice between two
alternatives: maintaining the
status quo or implementing a reform. If the politician retains
the status quo, the outcome of
this polity, y, is deterministic, which we normalize to 0. In
contrast, if the politician chooses
to undertake the reform, uncertainty will arise and the
politician must take an action to
9In her model, the agent is prevented from choosing the risky
project only by monetary incentives.
9
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address it. The outcome of a reform is given by
y = θ − (a− ω)2.. (1)
where θ measures the intrinsic value of reform, ω is the true
state of the world, and a is the
action taken by the politician in response to his assessment of
ω. The politician observes
the value of the reform, θ, before choosing whether or not to
implement it. It is common
knowledge that θ is continuously distributed on [−θ1, θ2] with a
distribution function F anddensity function f , where −θ1 < 0
< θ2, and θ1, θ2 ∈ (1, 2). The state of the world, ω, maytake
two values from Ω = {−1, 1}, each with a probability 1/2. Neither
the politician nor thepublic observes the true state. The action a
can be chosen from A = {−1, 1}. Thus, whenthe politician implements
a reform, he achieves the best outcome when his action matches
the state of the world.
The likelihood of success for the reform is affected by the
politician’s talent, t, which
can be high (t = H) or low (t = L). The talent of the politician
is his private information.
A high-talent politician receives an informative signal σ ∈ {−1,
1}, which matches the truestate with a probability
q = Pr(σ = ω) >3
4.
In contrast, a low-talent politician’s signal is completely
uninformative.10 It should be noted
that the assumption q > 3/4 does not affect the strategic
analysis. However, without this
assumption, no reform can be ex ante socially beneficial.
Further, let α be the probability
of t = H, which is commonly known. It is the public’s prior on
the politician, which can
also be viewed as the proportion of high-capability politicians
in the population.11
The setup of our model differs from the existing literature in a
number of ways. Here,
we stress two essential features of our model. First, the
distinction between policies (status
quo or reform) and actions is important in our model. Policies
are macro-level or “strategic”
10Although we do not model how the politician obtains his
signal, the politician’s talent in our model
may be interpreted as the ability to gather information from
various sources. The US presidential historian,
Erwin C. Hargrove (1966, pp 70-73 and pp 114-116), paints two
completely different pictures of Franklin D.
Roosevelt and Herbert Hoover with respect to information
gathering. Roosevelt brought together experts
who held a great variety of views and balanced them off against
each other, while Hoover did not enjoy
obtaining critical advice from anyone.11There is literature that
analyzes the composition of politicians as a group, which is
complementary to
our research, in that it offers an explanation for why
politicians may consist of a significant proportion of
low-ability individuals. Francesco Caselli and Massimo Morelli
(2004), Matthias Messner and Mattias K.
Polborn (2004), and Andrea Mattozzi and Antonio Merlo (2007,
2008) have offered various explanations for
why political processes tend to select low-ability individuals
to be politicians.
10
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decisions such as whether to reform financial regulations or
whether to start a war. In
contrast, actions are micro-level or “tactical” decisions such
as which instrument of regulation
to introduce in overhauling the financial system or how many
troops to deploy in the war.
Although there may be general agreement about how desirable a
reform is (θ), there may
well be disagreement over the optimal way to implement the
reform (a). The true nature
of the problem (ω) determines which action is ex post suitable
for implementing the reform.
Second, in contrast to many existing career-concern models with
risky experimentation (e.g.
Majumdar and Mukand 2004 and Suurmond, Swank, and Visser 2004),
the outcome of a
reform is measured by a continuous variable, instead of a binary
indicator (e.g., success or
failure) alone. It depends on both the quality of the reform
proposal (θ) and the quality
of implementation (|a− ω|), while both are subject to random
perturbation. This setupenriches our analysis in two aspects.
First, it enables an analysis of institution design.
A more sophisticated trade-off is involved in determining the
proper level of institutional
conservatism. Second, a comparative static analysis may be
performed on the probability
distribution of the value of reform, which may provide the
answer to questions like “should
the institution become more or less conservative when the ex
ante prospects of the reform
improve?”.
We assume that the proportion of “good” politicians in the
population is small:12
α <1
2.
Upon receiving σ (either informative or uninformative), the
politician takes an action.
The public observes the politician’s policy choice (status quo
or reform) and the final
outcome.13 Their updated belief, or the reputation of the
politician, can be written as
µi(y) ≡ Pr(t = H| y, i)
by Baye’s rule, where i = 0 indicates the status quo and i = 1
indicates reform. Borrowing
from much of the career concern literature, we assume that the
politician’s payoff depends
purely on his reputation. The politician therefore chooses the
action that maximizes his
reputation.
12This regularity assumption is only required so that in the
extreme case where the high type’s signal is
perfectly informative, the low type still has an incentive to
undertake reform and mimic the high type (see
the proof of Lemma 1).13In our setup, whether or not the public
observe the action is inconsequential. Once the politician
chooses
reform, the belief of the public is determined only by whether
the outcome is a “failure” or “success.”
11
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3 The Analysis
We adopt the solution concept of Perfect Bayesian Equilibrium
for our analysis. This requires
that (1) the politician and the public form Bayesian beliefs,
(2) the politician chooses the
action that maximizes his expected reputation if he undertakes
reform, and (3) the politician
chooses reform or the status quo to maximize his expected
reputation.
When the politician chooses to reform and takes an action a, the
expected outcome of
the reform is given by
E(y) = θ − Eω∈{−1,1}(a− ω)2 ≥ 0. (2)
Since a low-type politician’s signal is uninformative and the
two states are equally likely,
his choice of a is ex ante irrelevant. A high-type politician
maximizes his probability of
success by following his signal, i.e., choosing a = σ.
In the first-best situation, a politician would undertake reform
if and only if the expected
outcome E(y) is non-negative. A low-type politician should never
reform regardless of θ as
the expected loss from wrong actions always exceeds the benefit
of reform, that is,
E(y) =1
2θ +
1
2(θ − 4) = θ − 2 < 0,
because θ2 < 2. In contrast, the expected outcome for a
high-type politician is given by
E(y) = θ − 4(1− q).
Thus, the high type should undertake reform if and only if the
value of reform is sufficiently
high, i.e., θ ≥ 4(1− q).We now formally analyze the politician’s
policy choice. Let ρt(θ) be the probability
with which a type-t politician chooses reform when its value is
θ. We focus on Monotone
Equilibria, where the politician’s probability of undertaking
reform is non-decreasing in θ,
the potential value of reform. Let
θt ≡ inf{θ| ρt(θ) > 0}, t = H,L.
Thus, a type-t politician undertakes reform with a positive
probability only if the value of
reform exceeds the cutoff θt.
In monotone equilibria, when the politician maintains the status
quo, his reputation
among the public will be
µ0 =αF (θH) + α
∫ θ2θH
[1− ρH(θ)]f(θ)dθ[αF (θH) + α
∫ θ2θH
[1− ρH(θ)]f(θ)dθ+(1− α)F (θL) + (1− α)
∫ θ2θL
[1− ρL(θ)]f(θ)dθ
] . (3)
12
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When the politician implements a reform of value θ, his
reputation will become
µs =αqρH(θ)f(θ)
αqρH(θ)f(θ) + (1− α)12ρL(θ)f(θ)
when the reform succeeds, and
µf =α(1− q)ρH(θ)f(θ)
α(1− q)ρH(θ)f(θ) + (1− α)12ρL(θ)f(θ)
when the reform fails. Define
qt =
{q for t = H;12
for t = L.
If a type-t politician implements a reform with value θ, he
receives an expected payoff
µt = qtµs + (1− qt)µf .
We first establish the following lemma.
Lemma 1. (No full separation.) In any equilibrium that involves
a positive probability of
reform, (1) the cutoffs for reform must be the same for the low
type and the high type, i.e.,
θL = θH = θ; and (2) the high-type politician plays a pure
strategy ρH(θ) = 1 for any
θ ∈ [θ, θ2].
The above lemma states that there is no full separation of the
two types. The same cutoff
level θ = θL = θH applies to both types of politician. When θ
exceeds this threshold θ, the
high type always undertakes reform and the low type undertakes
reform with a positive
probability. We now turn to the characterization of the
equilibria of the game. For the
moment, we assume that the politician is maximally empowered. He
is allowed to initiate a
reform for any θ ∈ [−θ1, θ2]. We will explore the optimal
institutional rule that restricts hisstrategy space later in this
paper.
Proposition 1. There exists a continuum of Perfect Bayesian
Equilibria with cutoffs θ̄ ∈[−θ1, θ2]. For any θ, there exists a
unique equilibrium probability ρ∗ ∈ (0, 1), such that thelow-type
politician undertakes reform with the probability ρ∗ whenever he
receives a signal
θ ≥ θ. The equilibrium probability ρ∗ solves1
1 + λ(α)A=
1
2· 1
1 + λ(α)B+
1
2· 1
1 + λ(α)C, (4)
where
λ(α) =1− αα
, A = 1 + (1− ρ)κ(θ̄), κ(θ̄) = 1− F (θ̄)F (θ̄)
, B =12ρ
q, C =
12ρ
1− q.
13
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A continuum of perfect Bayesian equilibria exists in this game.
Each is characterized by
a distinct cutoff θ. When θ exceeds the cutoff, the low type
mimics his high-type counterpart
and conducts the reform with a probability ρ∗. Even though the
probability of success is
only 1/2, it is optimal for the low type to reform because the
choice of reform can be a signal
of high talent, which manipulates the posterior of the
public.
Comparative Statics
We now examine how the politician’s equilibrium behaviour varies
with environment param-
eters. First, we focus on the comparative statics in a given
equilibrium with a fixed θ. In
the equilibrium, the high-type politician reforms with
probability one whenever θ exceeds θ,
while the low type reforms with a probability ρ∗. Hence, in this
equilibrium, reform occurs
with a probability
ρ̄ = [1− F (θ)][α + (1− α)ρ∗]. (5)
The main results are summarized in the following
proposition.
Proposition 2. Fix any equilibrium with a cutoff θ.
1. The probability of reform by the low type, ρ∗, is strictly
decreasing in α, the public’s
prior. The overall likelihood of reform, ρ̄, also strictly
decreases with α.
2. The probability of reform by the low type, ρ∗, is strictly
decreasing in q. The overall
likelihood of reform, ρ̄, also strictly decreases with q.
3. Let ρ and ρ′ denote, respectively, the equilibrium
probabilities of the low type undertak-
ing reform associated with distributions F (·) and G(·). Let ρ̄
and ρ̄′ be their counter-parts for the overall likelihood of
reform. For a given θ, then, ρ > ρ′ and ρ̄ > ρ̄′ if F
(·)first order stochastically dominates G(·).
Now, we discuss the intuition and implications of these results.
Part 1 of Proposition 2
states that the low type conducts more reforms, when the public
holds a less favourable
prior assessment, or the proportion of capable politicians in
the population is smaller. A
more favourable prior assessment increases a politician’s loss
from a failed reform, which
consequently weakens his incentive to reform. By contrast, a
less favourable prior assessment
would strengthen his incentive to take risk, because it implies
a smaller loss from a failed
reform but a larger gain from an accidental success. This is
then interpreted as the pressure
to prove oneself phenomenon.
14
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Part 1 of Proposition 2 further shows that less reform would
take place overall when
the public has a more favourable assessment of the politician’s
talent (or there is a higher
proportion of capable politicians). Note that
∂ρ̄
∂α= [1− F (θ)][1− ρ∗ + (1− α)∂ρ
∗
∂α]. (6)
Two competing forces come into play when α is higher. On the one
hand, since the low type
reforms less often than the high type, more reform would be
expected when there is a higher
proportion of the high type. This effect is depicted by the term
(1−ρ∗). On the other hand,a larger α leads the low type to reform
less, which tends to reduce the frequency of reform.
The latter effect is witnessed in the term (1 − α)∂ρ∗∂α
. Our analysis shows that the second
effect always dominates.
This result yields an empirically testable hypothesis: when
there is a smaller proportion of
capable politicians in the population or when the public holds a
more pessimistic prior view,
more reform is expected. Conversely, the public observes less
reform when the politician has
a better reputation. This conclusion is drawn without knowledge
of the true type of the
politician, which is his private information and is
unverifiable.
Part 2 of Proposition 2 states that a low-type politician would
mimic his high-type
counterpart less often when the latter becomes more capable. The
logic of this result is as
follows. When the high type has a more accurate signal, the
public is more likely to attribute
an unsuccessful reform to a low-type politician, which
unambiguously increases his cost of
conducting reform. To put it simply, a higher q makes it more
difficult for a low type to
mimic his high-type counterpart, and therefore leads to a lower
probability of reform by the
low type. This result is interpreted as the tough act to follow
phenomenon.
The distribution of θ does not qualitatively alter the main
prediction of our analysis,
but it quantitatively affects the equilibrium behaviour. Part 3
of Proposition 2 describes
its effect on ρ∗. A stochastically dominant distribution implies
that the probability mass is
shifted upward. Hence, favourable reform proposals are more
likely to be realized. Given
the better prospect of reform, the public would then believe
that a no-reform outcome is
more likely to be caused by the politician’s lack of talent,
instead of a lack of opportunities
(a lower θ is realized). The public’s assessment of the
politician’s ability is therefore lowered
when they observe no reform, and this “forces” the low type to
reform more often. This
result yields interesting welfare implications, which are
discussed later in this paper.
15
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Comparison across Equilibria
Analogous to standard signalling game, our analysis yields
multiple equilibria. Each is
characterized by a distinct cutoff θ. We now explore how the
equilibrium behaviour of a
low-type politician (ρ∗) would differ across equilibria.
Lemma 2. The equilibrium probability of reform by the low type,
ρ∗, strictly decreases with
the cutoff θ.
The intuition is consistent with that of Part 3 of Proposition
2. A higher cutoff θ implies
that it is less likely for the value of available reform
proposals to exceed the equilibrium
cutoff. This increases the payoff of the low type when he does
not reform, as the public is
more likely to interpret it as the result of there being no
opportunity.
A higher cutoff θ in the prevailing equilibrium reflects
escalated conservatism or stronger
resistance to reform. Lemma 2 allows us to further explore a
politician’s preference for “con-
servatism”. We are interested in the following question: Does a
politician prefer equilibria
with more reform or less reform?
A less conservative equilibrium exerts mixed effects on the
payoff of a high-type politician.
On the one hand, it allows the public to infer his true type
more often. On the other hand,
an equilibrium with a lower cutoff θ encourages his low-type
counterpart to conduct more
reform, which makes his reform less informative and tends to
offset the gains he may obtain
from a successful reform. With a slight abuse of notation, let
us denote by Eµt(θ) the ex
ante expected payoff of a type-t politician in an equilibrium
with a cutoff θ. Our analysis
leads to the following proposition.
Proposition 3. The low-type politician always prefers an
equilibrium with a higher cutoff
θ; while the high-type politician always benefits from an
equilibrium with a lower θ. That is,dEµH(θ)
dθ< 0, and dEµL(θ)
dθ> 0.
Proposition 3 states that the high type always prefers an
equilibrium where he can reform
more, while the low type suffers from this. Two forces
contribute to the low type’s aversion
to reform. First, it embodies the logic of Part 3 of Proposition
2: less reform allows the
low type to pool with his high-type counterpart more often and
to reveal less information.
Second, when the low type reforms less often, the public would
believe that a reform is
increasingly likely to be implemented by the high type, which
mitigates the damage to the
low type when he fails in his reform.
16
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4 Institutional Design
In the preceding analysis, we have assumed that the politician
in office is maximally em-
powered, and is subject to no institutional constraints in
making a choice between policy
alternatives. Based on the equilibrium analysis above, we may
now turn to the investigation
of the optimal institution that governs the politician’s scope
of discretion.
Consider a context in which a legislature exists, with the goal
of maximizing social wel-
fare. The legislature can be a parliament, an advisory
committee, a board of directors, etc.
It enforces a limit of authority by restricting the action space
of the politician. The rule set
by the legislature can be understood as constitution, or the
widely observed organizational
bureaucracies (see Tirole 1986), which restrict the discretion
of the decision maker. Such
institutional restrictions on a decision maker’s discretion are
prevalent in various organi-
zations. For instance, the US President must obtain
congressional approval for his policy
choices. Military commanders have to honor “rules of engagement”
in the use of force. An
administrator of the Environmental Protection Agency has to rely
on limited authority and
resources to regulate polluting industries. In addition, judges
are often encouraged to refrain
from exercising their power to strike down existing laws.
In particular, the institution of focus in this setting
resembles a “rule of engagement.”
The legislature cannot observe the true type of the politician.
However, the behaviour of the
politician is subject to its regulation. The legislature sets a
threshold θ̂ and a politician is
authorized to undertake a reform only if the potential value of
the reform proposal exceeds
θ̂. The implementation of the rule may be interpreted in two
ways. First, it may be assumed
that the politician is subject to ex post auditing or
monitoring, and would be held accountable
and be subject to severe non-pecuniary punishment, e.g.,
termination of his career, if the rule
was breached and a reform with θ < θ̂ was carried out. As
mentioned earlier, the assumption
of θ2 < 2 guarantees that the true value of θ can be
correctly inferred once the outcome y
of a reform is realized. Second, analogous to Tirole (1986), it
may be assumed that the
politician can provide a partially verifiable report on the
realization of θ to the legislature
when he advocates a reform, but such information is neither
verifiable nor accessible ex ante
to the general public.14
The authority granting rule aims at maximizing social welfare. A
higher θ̂ represents a
more conservative rule that grants less authority to the
politician; while a lower θ̂ represents
14In addition, it should be noted that the legislature does not
use contingent monetary transfer to elicit
desirable action. The performance of a decision maker can be
non-contractible in a wide variety of settings.
Consider the examples of career politicians, supreme court
justices, and district attorneys, for instance.
17
-
a more liberal rule that is more tolerating of reform. As
aforementioned, the society may
expect a positive gain from the reform that is undertaken by the
high-type politician (when
θ is sufficiently high), while always expects a net loss from
the reform that is undertaken
by the low type. A trade-off can be triggered when a more
conservative rule is adopted.
By restricting reform, it could reduce the damage from the
latter on the one hand, while it
could also lead to lesser gain from the former on the other.
As seen in the previous section, without further restrictions on
out-of-equilibrium beliefs,
there exist multiple equilibria. It remains the case, when a
threshold rule θ̂ is enforced. Each
equilibrium is characterized by a distinct cutoff θ ∈ [θ̂, θ2].
The multiplicity of equilibria thusprevents us from drawing
conclusive predictions on the behaviour of the politician when
he
is subject to a particular institutional rule. Our subsequent
analysis proceeds in two steps.
First, we employ a popularly adopted refinement technique to
select the most plausible
equilibrium when an institutional rule θ̂ is in place. We follow
Jeffrey S. Banks and Joel
Sobel (1987) and apply the “Divinity Criterion” to select the
most plausible equilibrium,
which turns out to be unique. Second, we characterize the
optimal institutional rule based
on the unique equilibrium prediction through our refinement.
4.1 Equilibrium Refinement
Analogous to other conventional refinement techniques for
signalling games, the Divinity Cri-
terion seeks to impose additional restrictions on
out-of-equilibrium beliefs. Fix an arbitrary
equilibrium. When an unexpected signal is received, the receiver
has to form a conjecture
about the type of sender who deviates from the equilibrium path.
The criterion is built
upon the notion that a sender is willing to deviate by sending
an unexpected signal only if
he hopes for a payoff that is higher than that obtained in the
equilibrium. Consider two
different types of senders. If one type is more likely to
benefit from a given deviation, then
the receiver should believe that the former type deviates at
least no less often than the latter.
The receiver must assign in his posterior more weight to the
type that is more likely to gain
from the given deviation. Banks and Sobel (1987) contend that an
equilibrium is sensible
only if it can be supported by a belief system that satisfies
such requirement. A formal
definition of this refinement criterion is provided in the
Appendix. Our analysis leads to the
following.
Proposition 4. When a threshold rule θ̂ is implemented, there is
a unique equilibrium that
satisfies the Divinity Criterion. In this equilibrium, θ =
θ̂.
18
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Among all equilibria that are permitted by the threshold rule,
only the most aggressive
equilibrium (with θ = θ̂) satisfies the Divinity Criterion. This
result is underpinned by the
fact that a capable politician always prefers to reform as much
as possible, as evidenced
by Proposition 3. When the high type reforms more, the low type
is in turn “forced”
to follow suit. The refinement criterion simply requires the
belief system to reflect this
fact. This refinement exercise paves a foundation for our
subsequent analysis of the optimal
institutional design, i.e. the welfare-maximizing θ̂∗.
4.2 Institutional Design: Optimal “Rule of Engagement”
In this subsection, we explore the welfare maximizing threshold
rule. Based on Theorem 4,
under a threshold rule θ̂, the most plausible equilibrium in the
subsequent game is the one
with the cutoff θ = θ̂. Consider an arbitrary threshold rule θ̂.
The social welfare in this
equilibrium can be written as a function
W = α
∫ θ2θ̂
[θ − 4(1− q)]f(θ)dθ︸ ︷︷ ︸W1
+ (1− α) ρ∗|θ=θ̂∫ θ2θ̂
(θ − 2)f(θ)dθ︸ ︷︷ ︸W2
. (7)
By implementing a proposal of value θ ≥ θ̂, the high-type
politician contributes an expectedoutcome θ−4(1− q), while the
low-type generates a loss θ−2. The term W1 thus representsthe
overall net gain from the reform that is undertaken by the high
type; while the term
W2 depicts the overall loss from the inefficient reform that is
undertaken by the low type.
Apparently, the optimal rule θ̂∗
must exceed 4(1− q).Consider an arbitrary reform proposal with a
value θ ∈ [θ̂, θ2]. The ex ante expected
outcome of this proposal under the threshold rule θ̂ is given
by
E(y| θ, θ̂) = α[θ − 4(1− q)] + (1− α) ρ∗|θ=θ̂
(θ − 2),
which, for a given θ̂, strictly increases with θ. Define ρ ≡
limθ↑θ2 ρ∗. We have the following.
Lemma 3. Whenever(1− α)ρ
α<θ2 − 4(1− q)
2− θ2, (8)
there exists a unique θ̂0∈ (4(1− q), θ2) that solves
E(y| θ̂, θ̂) = α[θ̂ − 4(1− q)] + (1− α) ρ∗|θ=θ̂ (θ̂ − 2) =
0.
Further, θ̂0
exhibits the following property: for any θ̂ ∈ [−θ1, θ2],
E(y|θ̂, θ̂) T 0 if and only if θ̂ T θ̂0. (9)
19
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Consider an arbitrary threshold rule θ̂. The expression in (9)
depicts the expected out-
come from a “marginal” reform proposal, i.e. the proposal with a
value of exactly θ̂. The
property of θ̂0
demonstrated by (9) yields interesting implications.
Specifically, the threshold
rule θ̂0
can be used as a natural benchmark. If the prevailing rule θ̂ is
less conservative than
θ̂0, it must admit “bad” reform: reform with a value in [θ̂,
θ̂
0) would be allowed, which yields
negative expected outcome.15 In contrast, if the prevailing rule
θ̂ imposes more restrictions
than θ̂0, it must thwart otherwise “good” reform: reform with a
value in [θ̂
0, θ̂) would be
prohibited, which would otherwise yield a positive expected
outcome. However, a threshold
rule θ̂0, by its very definition, completely rules out “bad”
reform, while it does not thwart
otherwise beneficial reform. Hence, is θ̂0
the optimal cutoff θ̂∗
that maximizes social welfare?
If not, then would the optimal institution be more conservative
or less conservative, i.e., does
the optimum require θ̂∗< θ̂
0or θ̂
∗> θ̂
0?
Our analysis yields the following result.
Proposition 5. A unique socially optimal cutoff θ̂∗∈ (θ̂
0, θ2) exists if and only if (8) is
satisfied; otherwise, the public prefers no reform at all, i.e.,
θ̂∗
= θ2.
This proposition states that a unique optimal threshold exists,
and the optimum θ̂∗
must exceed θ̂0
whenever θ̂0
exists. The welfare maximizing institutional rule requires
more
conservatism than θ̂0. In order to understand its logic, let us
now analyze the marginal
impact of an increase in θ̂ on social welfare. Taking first
order derivative of (7) with respect
to θ̂ yields
dW
dθ̂= f(θ̂)
−α[θ̂ − 4(1− q)]︸ ︷︷ ︸a
− (1− α) ρ∗|θ=θ̂ (θ̂ − 2)︸ ︷︷ ︸b
+(1− α)d ρ∗|θ=θ̂ /dθ̂
f(θ̂)
∫ θ2θ̂
(θ − 2)f(θ)dθ︸ ︷︷ ︸c
. (10)
An increase in θ̂ affects W through three venues. First, it
reduces the beneficial reform
that is undertaken by the high type, and therefore decreases the
gains from reform by
the high-type politician. This loss is shown by the term a,
which is negative whenever
θ̂ > 4(1−q). Second, a higher cutoff θ̂ (directly) reduces
the expected loss from the inefficientreform that is undertaken by
the low type. This (direct) effect is embodied by the term b.
Third, it leads the low-type politician to refrain from
undertaking reform for any given θ ≥ θ̂
15Based on the definition of θ̂0, under the threshold θ̂ <
θ̂
0, even a reform with a value that is higher than
θ̂0
may still incur an expected loss.
20
-
(because d ρ∗|θ=θ̂ /dθ̂ < 0 by Lemma 2), which further
reduces the loss from the inefficientreform that is undertaken by
the low type. This positive (indirect) effect is depicted by
the
term c.
The decomposition of dW/dθ̂ demonstrates that θ̂0
is never the optimal threshold. When
θ̂ = θ̂0
is enforced, social welfare can be increased by raising θ̂: the
sum of the first two terms
simply boils down to E(y| θ̂0, θ̂
0), and is equal to zero based on the definition of θ̂
0, but the
last term, c, remains positive. It implies that W can be further
increased by increasing θ̂
from θ̂0: although a more conservative threshold would deter
otherwise productive reform,
it further deters the detrimental reform that is undertaken by
the low type by decreasing ρ∗.
The reduced loss could more than compensate for the sacrificed
gain from those otherwise
efficient reforms with value in (θ̂0, θ̂∗). Therefore, the
social optimum must require a cautious
attitude about potential reform, despite it inhibiting seemingly
beneficial reform.
Reform can be permitted, i.e., θ̂∗< θ2, if and only if
condition (8) is met. Because ρ
decreases with α (by Proposition 1), the left hand side of (8)
strictly decreases with α. Hence,
this condition is more likely to be met with a larger α, i.e.,
the presence of a higher proportion
of high-talent politicians in the population. When the talent
required for successful reform is
very scarce, the public would not expect sufficient gain from
reform. The public then prefer
no reform at all.
Similarly, the condition is more likely to be met with a larger
q. In other words, reform
is socially beneficial only when the success of reform is
sufficiently likely.
These arguments further lead to more general conclusions on the
impact of α and q on
the properties of θ̂∗∈ (θ̂
0, θ2).
Proposition 6. The socially optimal cutoff θ̂∗
decreases with α and q.
A greater α or q always allows for less restriction on the
politician’s activities.
Example: Uniform Distribution
Proposition 3 demonstrates that the equilibrium behaviour
depends on the properties of the
distribution of θ. We now discuss its impact on the optimal
threshold rule θ̂∗. To allow for
a handy and informative analysis, consider an example in which
the value of reform follows
a uniform distribution
F (θ) =θ + θ1θ2 + θ1
and the high-talent politician receives a perfect signal with q
= 1.
21
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An increase in θ2 implies that the probability mass of the
distribution is shifted upward,
high-valued reform proposals are more likely to occur, and more
beneficial opportunities can
be expected. The environment thus seems to favor more reform.
Before we examine its
impact on the socially optimal institutional rule, let us
examine its welfare implications in
an arbitrary equilibrium with a fixed θ. Figure 1 testifies to a
non-monotonic relationship
between social welfare and θ2 when θ is given. The society may
not be better off when more
opportunities are available. The logic can be seen in
Proposition 3: for a given cutoff θ, a
stochastically dominant distribution of θ forces the low type to
reform more, which increases
the loss from his inefficient reform.
The ambiguous welfare implication compels us to further look
into its implications on the
socially optimal institution θ̂∗. The implications of a higher
θ2 on the social optimum θ̂
∗are
also ambiguous. On the one hand, low-valued reform proposals
would emerge less often, and
cause less damage, which encourages a more liberal rule to reap
more benefits from reform.
On the other hand, it could demand a more conservative rule in
order to discipline the low
type. Our analysis leads to the following proposition.
Proposition 7. The socially optimal cutoff point for reform,
θ̂∗, strictly increases with θ2.
We find that when the probability mass of the uniform
distribution is shifted upward,
i.e., when more opportunities for reform can be expected, it
unambiguously lifts the optimal
cutoff θ̂∗. That is, a more optimistic environment requires
additional caution and a more
conservative socially optimal rule.
5 Concluding Remarks
In this paper, we study a politician’s incentive to implement
reform when his true ability
is privately known but he is concerned about the public’s
perception of his abilities. The
politician thus chooses his policy and action to maximize his
reputation payoff. We find
that a high-talent politician always attempts to reform as much
as possible, which “forces”
his low-talent counterpart to mimic with a positive probability.
Socially inefficient reform
therefore results. Further, we explore the socially optimal
level of empowerment, and find
that the social optimum can be achieved only if the prevailing
institutional rule implements
proper conservatism and deters some otherwise efficient
reform.
22
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Figure 1: An example that demonstrates the non-monotonic effect
of θ2 on social welfare
(θ1 = 1.1, q = 1.0, α = 0.2, and θ̄ = 1.2).
Our paper sets forth a simple theoretical framework to
investigate a politician’s incentive
to undertake innovative but risky actions when he has reputation
concerns. It leaves open
many possibilities for extensions and variations. For instance,
the model may be extended
to allow for a larger strategy space, or to allow the payoff of
the politician to depend on
the realized outcome of his policy choice. Although we believe
extensions in these directions
would not yield predictions that fundamentally depart from those
that come out of the
current setting, these more comprehensive settings may yet spawn
richer comparative statics
that further add to our understanding of this issue. The
analysis may also be extended to
a dynamic setting. For example, the “pressure to prove oneself”
result points toward the
following conjecture: a politician who has failed in the past is
more likely to take radical
action in the future. Past failure lowers his rating among the
public, which therefore makes
it more lucrative for him to pursue accidental success in the
future.
23
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Appendix: Proofs
Proof of Lemma 1
Proof. First, in any equilibrium, the low type does not reform
when the realized value of
reform satisfies θ < θH . If he did in equilibrium, since the
high type does not reform for
θ < θH , the public must assign probability one to him being
the low type regardless of
success or failure, thereby leaving him worse off than if he
does not reform. Hence, we must
have θL ≥ θH in any equilibrium. In the following argument, we
show that their strategiesfollow the same cutoff θ = θL = θH .
Second, observe that q > 1/2 implies that µs > µf as long
as ρH(θ) > 0 and ρL(θ) > 0.
But, this implies that µH(θ) > µL(θ). Thus, whenever both
types choose reform with positive
probabilities, the high type must choose it with probability
one.
Third, we claim that whenever the high type chooses reform with
a positive probability,
the low type must do so as well. We have shown that whenever
both types choose reform
with positive probability, the high type’s probability of reform
is one and therefore at least
as high as the low type’s. Therefore, the overall probability
for the low type to choose the
status quo, P0L, is weakly higher than that for the high type,
P0H . Thus, if the low type
chooses the status quo, his reputation is µ0 =
αP0HαP0H+(1−α)P0L
≤ α.However, if he deviates and undertakes reform, he is
believed to be a high type with
probability one if q < 1. If q = 1, his payoff depends on the
public’s off-equilibrium belief
when reform fails. However, he succeeds with probability 12, and
the resulting expected
payoff still exceeds α. Therefore, it cannot be that the low
type always chooses the status
quo when the high type chooses reform. This completes our
proof.
Proof of Proposition 1
Proof. We now determine the low-type politician’s probability of
reform for a proposal with
value θ, which we denote by ρ(θ) to economize on notation. By
(3), if the politician maintains
the status quo, his payoff is
µ0 =αF (θ)
αF (θ) + (1− α)F (θ) + (1− α)∫ θ2θ
[1− ρ(θ)]f(θ)dθ̂
=α
α + (1− α)F (θ)+∫ θ2θ
[1−ρ(θ)]f(θ)dθF (θ)
. (11)
24
-
Note that it does not depend on θ. On the other hand, if the
low-type politician undertakes
the reform, his payoff is given by
µL(θ) =1
2· qαf(θ)qαf(θ) + 1
2(1− α)ρ(θ)f(θ)
+1
2· (1− q)αf(θ)
(1− q)αf(θ) + 12(1− α)ρ(θ)f(θ)
=1
2· α
α +12(1−α)ρ(θ)
q
+1
2· α
α +12(1−α)ρ(θ)
1−q
. (12)
If the low-type plays a completely mixed strategy, ρ(θ) ∈ (0,
1), we need to equate (11)and (12), which implies that ρ(θ) must be
a constant ρ regardless of the value θ. Conse-
quently, in equilibrium,
α
α + (1− α)F (θ)+(1−ρ∗)[1−F (θ)]F (θ)
=1
2· α
α + (1− α)12ρ∗
q
+1
2· α
α + (1− α)12ρ∗
1−q
, (13)
which we may rewrite as
1
1 + λ(α)A=
1
2· 1
1 + λ(α)B+
1
2· 1
1 + λ(α)C, (14)
where
λ(α) =1− αα
, A = 1 + (1− ρ)κ(θ̄), κ(θ̄) = 1− F (θ̄)F (θ̄)
, B =12ρ
q, C =
12ρ
1− q.
This is the same equation as (4). The expression λ(α) is the
likelihood ratio of the low type
versus the high type, κ(θ̄) is the likelihood ratio of reform
having good prospects versus
bad prospects, and A, B, and C are respectively the likelyhood
ratios of the low type
not reforming, having a successful reform, and having a failed
reform versus the high type
obtaining each outcome. Consider the equilibrium condition (14).
Note that its LHS is µ0
and its RHS is µL. When ρ = 0, µ0 ≤ α, while µL = 1 as B = C =
0. Therefore, µ0 < µL.
By contrast, when ρ = 1, µ0 = α as A = 1, and µ1L < α, which
can be seen from the fact
that when ρ = 1
αµH + (1− α)µL = α,
while µL < µH . Therefore, µ0 > µL.
Both the RHS and LHS of (14) are continuous in ρ. Furthermore,
it is straightforward
to show that the LHS strictly increases with ρ, while the RHS
strictly decreases with ρ.
Hence, we conclude that there must exist a unique ρ∗ ∈ (0, 1)
that solves (14).
25
-
Proof of Proposition 2
Proof. Part 1 Consider the equilibrium condition (14). We have
shown above that the left
hand side of (14) is increasing in ρ∗ and the right hand side
decreasing in ρ∗. Note that A,
B, and C do not contain α in their expressions. Thus, we may
write
∂(LHS −RHS) of (14)∂α
= − 1α2
[− A
(1 + λ(α)A)2+
1
2· B
(1 + λ(α)B)2+
1
2· C
(1 + λ(α)C)2
].
We want to evaluate the above derivative at the value of ρ that
satisfies (14). Observe that
0 < B < C as q ≥ 3/4 > 1/2, we may conclude then B <
A < C based on (14). From (14),we obtain
A
1 + λ(α)A=
1
2· B
1 + λ(α)B+
1
2· C
1 + λ(α)C.
Therefore,
1
2· B
(1 + λ(α)B)2+
1
2· C
(1 + λ(α)C)2
=A
1 + λ(α)A
[B
1+λ(α)B
B1+λ(α)B
+ C1+λ(α)C
· 11 + λ(α)B
+
C1+λ(α)C
B1+λ(α)B
+ C1+λ(α)C
· 11 + λ(α)C
].
The expression in the brackets is a convex combination of
11+λ(α)B
and 11+λ(α)C
. Since 0 <
B < C, the former is larger, but the coefficient on the
former is smaller than 12. Using (14),
we have1
2· B
(1 + λ(α)B)2+
1
2· C
(1 + λ(α)C)2<
A
(1 + λ(α)A)2.
Hence, at the value of ρ that satisfies (14),
∂(LHS −RHS) of (14)∂α
> 0.
Thus, by the implicit function theorem, the probability of
reform by the low type, ρ∗, is
decreasing in α, the probability of high type.
Next, we verify the comparative statics of ρ̄. Because ∂ρ∗
∂α< 0, we only need to show∣∣(1− α)∂ρ∗
∂α
∣∣+ ρ∗ > 1. We have∣∣∣∣(1− α)∂ρ∗∂α∣∣∣∣+ ρ∗
=(1− α)α2
ρ∗2[1−[4q(1−q)][4q(1−q)+λ(α)ρ∗]2
[κ(θ̄) + 1 + 4q(1−q)[1−[4q(1−q)][4q(1−q)+λ(α)ρ∗]2 ]
+ ρ∗
26
-
Rearranging the equilibrium condition leads to
(1− ρ∗)κ(θ̄) = ρ∗(λ(α)ρ∗ + 1)
4q(1− q) + λ(α)ρ∗− 1
=ρ∗(λ(α)ρ∗ + 1)− 4q(1− q)− λ(α)ρ∗
4q(1− q) + λ(α)ρ∗
=λ(α)ρ∗2 + ρ∗ − λ(α)ρ∗ − 4q(1− q)
4q(1− q) + λ(α)ρ∗,
which yields
κ(θ̄) =λ(α)ρ∗2 + ρ∗ − λ(α)ρ∗ − 4q(1− q)
[4q(1− q) + λ(α)ρ∗](1− ρ∗),
and therefore
κ(θ̄) + 1 =λ(α)ρ∗2 + ρ∗ − λ(α)ρ∗ − 4q(1− q) + [4q(1− q) +
λ(α)ρ∗](1− ρ∗)
[4q(1− q) + λ(α)ρ∗](1− ρ∗)
=ρ∗[1− 4q(1− q)]
[4q(1− q) + λ(α)ρ∗](1− ρ∗).
Hence,
[κ(θ̄) + 1 +4q(1− q)[1− 4q(1− q)]
[4q(1− q) + λ(α)ρ∗]2]
=ρ[1− 4q(1− q)]
[4q(1− q) + λ(α)ρ∗](1− ρ∗)+
4q(1− q)[1− 4q(1− q)][4q(1− q) + λ(α)ρ∗]2
=1− 4q(1− q)
[4q(1− q) + λ(α)ρ∗]2(1− ρ∗)[4q(1− q) + λ(α)ρ∗2].
We then obtain ∣∣∣∣(1− α)∂ρ∗∂α∣∣∣∣+ ρ∗
=(1− α)α2
·ρ∗2[1−4q(1−q)]
[4q(1−q)+λ(α)ρ∗]21−4q(1−q)
[4q(1−q)+λ(α)ρ∗]2(1−ρ∗) [4q(1− q) + λ(α)ρ∗2]+ ρ∗
=(1− α)α2
· (1− ρ∗)ρ∗2
[4q(1− q) + λ(α)ρ∗2]+ ρ∗.
For our purpose, we only need to show (1−α)α2·
ρ∗2[4q(1−q)+λ(α)ρ∗2] > 1. Rewrite it as
(1−α)α2·
ρ∗2
[4q(1−q)+λ(α)ρ∗2] =1α· λ(α)ρ
∗2
[4q(1−q)+λ(α)ρ∗2] =1α· 1[4q(1−q)λ(α)ρ∗2
+1]. Hence, it suffices to show 1
[4q(1−q)λ(α)ρ∗2
+1]> α.
We claim 1[4q(1−q)λ(α)ρ∗2
+1]> 1
2> α, i.e., 4q(1− q) > λ(α)ρ∗2. To show that, recall the
equilibrium
condition 1+(1−ρ∗)m] = ρ∗(λ(α)ρ∗+1)
4q(1−q)+λ(α)ρ∗ , which impliesρ∗(λ(α)ρ∗+1)
4q(1−q)+λ(α)ρ∗ > 1⇔ ρ∗(λ(α)ρ∗+1) >
4q(1−q)+λ(α)ρ∗ ⇔ λ(α)ρ∗2+ρ∗ > 4q(1−q)+λ(α)ρ∗. Because λ(α)
> 1, λ(α)ρ∗2 > 4q(1−q)must hold.
27
-
Part 2 The equilibrium condition can be rewritten as
g(ρ∗, α, q, θ) ≡ [1 + (1− ρ∗)κ(θ̄)]− ρ∗[λ(α)ρ∗ + 1]
4q(1− q) + λ(α)ρ= 0. (15)
Since q ≥ 34, G(ρ∗, α, q) is decreasing with q. Further,
∂g(ρ∗, α, q, θ)
∂ρ∗= −
[κ(θ̄) + 1 +
4q(1− q)[1− [4q(1− q)]2][4q(1− q) + λρ∗]2
]< 0.
Recall that κ(θ̄) = [1− F (θ)]/F (θ). We then obtain
dρ∗
dq= −
∂g(ρ∗,q)∂q
∂g(ρ∗,q)∂ρ∗
< 0.
That ρ̄ is decreasing in q is an immediate consequence by its
definition in (5).
Part 3 Consider the equilibrium condition (14). Since F first
order stochastically domi-
nates G, we have F (θ) < G(θ). This implies that for any
given ρ, LHS of (14) for F is lower
than that for G, since κ(θ̄) is larger for F than for G.
As we have shown above, LHS of (14) strictly increases with ρ,
while RHS strictly de-
creases. Thus, only if ρ > ρ′ can make (14) hold for both
distributions. From this, the
definition of ρ̄ in (5), and the assumption that F first order
stochastically dominates G, we
can immediately see that ρ̄ > ρ̄′.
Proof of Lemma 2
Proof. Recall the equilibrium condition (15). When θ increases,
κ(θ̄) ≡ 1−F (θ)F (θ)
must decrease,
which causes g(ρ∗, α, q, θ) to decrease. Further, as we have
shown in the proof for previous
results, g(ρ∗, α, q, θ) strictly decreases with ρ∗. By the
implicit function theorem, we establish
that when θ increases, ρ∗ must decrease.
Proof of Proposition 3
Proof. Recall that the equilibrium is defined by the
equation
α
1 + (1−α)(1−ρ∗)[1−F (θ)]
F (θ)︸ ︷︷ ︸µ0
=1
2[
α
α + (1− α)12ρ∗
q︸ ︷︷ ︸µs
+α
α + (1− α)12ρ∗
1−q︸ ︷︷ ︸µf
].
The politician in office receives a payoff µ0 when he maintains
the status quo. He receives a
payoff µs when he successfully implements a reform and µf when
he fails. In any equilibrium
28
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with a given θ, the type-t politician receives a payoff
µt =
{qtµ
s + (1− qt)µf , for θ ≥ θ;µ0, for θ < θ
.
Hence, in this equilibrium, the expected payoff of a type-t
politician is given by
E(µt) = µ0F (θ̄) + [qtµ
s + (1− qt)µf ][1− F (θ̄)].
First, we claim that when θ̄ increases, E(µH) and E(µL) change
in opposite directions.
Therefore, the first part of the proposition implies the second
part. This claim is an impli-
cation of the fact αE(µH) + (1− α)E(µL) = α, or
E(µH) = 1− λ(α)E(µL).
Now, we prove the first part of the proposition. For a low-type
politician, E(µL) = µ0
because µ0 = 12µs + 1
2µf . Hence, we need only verify dµ
0
dθ> 0. Define
H(ρ∗, θ) =α
1 + (1−α)(1−ρ∗)[1−F (θ)]
F (θ)︸ ︷︷ ︸µ0
− 12
[α
α + (1− α)12ρ∗
q︸ ︷︷ ︸µs
+α
α + (1− α)12ρ∗
1−q︸ ︷︷ ︸µf
].
We havedµ0
dθ=∂µ0
∂θ+∂µ0
∂ρ∗· ∂ρ
∗
∂θ=∂µ0
∂θ+∂µ0
∂ρ∗· [−∂H(ρ
∗, θ)
∂θ�∂H(ρ∗, θ)
∂ρ∗].
Because ∂H(ρ∗,θ)
∂θ= ∂µ
0
∂θ, we then have dµ
0
dθ= ∂µ
0
∂θ[1 − ∂µ0
∂ρ∗�∂H(θ,ρ
∗)∂ρ∗
]. We must have 1 −∂µ0
∂ρ∗�∂H(θ,ρ
∗)∂ρ∗
> 0 because ∂H(ρ∗,θ)
∂ρ∗= ∂µ
0
∂ρ∗− 1
2(∂µ
s
∂ρ∗+ ∂µ
f
∂ρ∗), while ∂µ
0
∂ρ∗> 0, ∂µ
s
∂ρ∗, ∂µ
f
∂ρ∗< 0.
Divinity Criterion and Proof of Proposition 4
We first formally translate the notion of the Divinity Criterion
into our context. Fix an
equilibrium with a cutoff θ > θ̂. Suppose that an unexpected
reform with a value θ ∈ [θ̂, θ)takes place. The public infers from
its outcome the value of θ. The public forms a set
of beliefs φθ ≡ {ρ̃H(θ), ρ̃L(θ)}, where ρ̃t(θ) specifies the
probability of a type-t politicianto undertake this reform. Given
this conjecture, a type-t politician, when deviating, has a
payoff
µt(θ;φθ) = qt ×αρ̃H(θ)q
αρ̃H(θ)q +12(1− α)ρ̃L(θ)
+(1− qt)×αρ̃H(θ)(1− q)
αρ̃H(θ)(1− q) + 12(1− α)ρ̃L(θ).
Let µ∗t denote the payoff of a type-t politician in the
equilibrium. Further define Φtθ ≡
{φθ|µt(θ;φθ) > µ∗t}. We then have the following.
29
-
Definition 1. Under Divinity Criterion, the out-of-equilibrium
belief φθ satisfies:
ρ̃t(θ) ≥ ρ̃t′(θ) if Φt′
θ ⊂ Φtθ, with t ∈ {H,L} and t 6= t′.
In what follows, we formally establish Proposition 4.
Proof. Consider an arbitrary equilibrium with a cutoff θ >
θ̂. Suppose that an unexpected
reform is undertaken, and the public observes that the reform
has a potential value θ ∈ [θ̂, θ).Define α̃ ≡ αρ̃H(θ)
αρ̃H(θ)+(1−α)ρ̃L(θ). By taking this reform, the high type has an
ex ante expected
payoff
µH(θ; α̃) = q ×α̃q
α̃q + 12(1− α̃)
+ (1− q)× α̃(1− q)α̃(1− q) + 1
2(1− α̃)
= q × 11 + 1
2α̃q(1− α̃)
+ (1− q)× 11 + 1
2α̃(1−q)(1− α̃).
She has an incentive to deviate if and only if πH(θ)−µ0 ≥ 0. The
low type, by contrast, hasan ex ante expected payoff
µL(θ; α̃) =1
2× 1
1 + 12α̃q
(1− α̃)+
1
2× 1
1 + 12α̃(1−q)(1− α̃)
.
She has an incentive to deviate if and only if πL(θ) − µ0 ≥ 0.
Because 11+ 12α̃q
(1−α̃) >
11+ 1
2α̃(1−q) (1−α̃), we see that µH(θ) − µ0 > 0 whenever µL(θ) −
µ0 ≥ 0. It implies that the
high type is always more likely to deviate by undertaking an
expected reform than the low
type. The out-of-equilibrium belief must require α̃ ≥ α to
reflect this fact.We now prove µH(θ) > α. To see this, observe
that
µH(θ; α̃) = q ×α̃q
α̃q + 12(1− α̃)
+ (1− q)× α̃(1− q)α̃(1− q) + 1
2(1− α̃)
> [α̃q +1
2(1− α̃)]× α̃q
α̃q + 12(1− α̃)
+ [α̃(1− q) + 12
(1− α̃)]× α̃(1− q)α̃(1− q) + 1
2(1− α̃)
= α̃ > α,
where we have used the fact that q > 1/2.
Given such a belief, the high type must deviate when θ is
realized, because his expected
payoff µH(θ) > α > µ0. The original equilibrium cannot be
sustained by a belief system
that satisfies Divinity Criterion.
30
-
Proof of Lemma 3
Proof. Consider the value of
E(y| θ̂, θ̂) = α[θ̂ − 4(1− q)] + (1− α) ρ∗|θ=θ̂ (θ̂ − 2).
When θ̂ = 4(1− q), it must be negative. When θ̂ approaches θ2,
we have its value approachα[θ2− 4(1− q)] + (1−α)ρ(θ2− 2), which is
positive if and only if
(1−α)ρα
< θ2−4(1−q)2−θ2 . Further
recall that E(y| θ, θ̂) strictly increases with both θ and θ̂.
There must exist a unique θ̂0
that
solves the equation.
Lemma 4 and Its Proof
Because f(θ̂) > 0 for all θ̂ ∈ [−θ1, θ2], the sign of (10) is
the same as that of dWdθ̂ �f(θ̂). Forour purpose, it suffices to
explore dW
dθ̂�f(θ̂). We then establish the following lemma.
Lemma 4. The expression dWdθ̂
�f(θ̂) strictly decreases with θ̂.
Proof. Recall that the equilibrium condition (15) for θ = θ̂ can
be written as
g(ρ∗, κ) = [1 + (1− ρ∗)κ(θ̂)]− ρ∗(λρ∗ + 1)
4q(1− q) + λρ∗= 0,
where κ(θ̂) = [1 − F (θ̂)]/F (θ̂), as defined in (14). Hence, we
have ∂g(ρ∗,κ(θ̂))∂κ
= λ(1 − ρ∗).Because ∂g(ρ
∗,κ(θ̂))∂ρ∗
= −[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ]2 ] < 0, we must have
dρ∗
dκ=
1− ρ∗
κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2,
and thereforedρ∗
dθ̂�f(θ̂) = − 1− ρ
∗
[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ][F (θ̂)]2.
We now claim −dρ∗dθ̂
�f(θ̂) strictly decreases with θ̂. We have
d[−dρ∗dθ̂
�f(θ̂)]
dθ̂=
−dρ∗dθ̂ [κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2][4q(1−q)+λρ∗]2 ][F
(θ̂)]2−(1− ρ∗)
d{[κ(θ̂)+1+ 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2][F (θ̂)]2}
dθ̂
{[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ][F (θ̂)]2}2
.
Note that −dρ∗dθ̂
[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ][F (θ̂)]2 = (1 − ρ∗)f(θ̂). We then only need
to
proved{[κ(θ̂)+1+ 4q(1−q)[1−[4q(1−q)]
2]
[4q(1−q)+λρ∗]2][F (θ̂)]2}
dθ̂> f(θ̂). Rewrite [κ(θ̂)+1+ 4q(1−q)[1−[4q(1−q)]
2][4q(1−q)+λρ∗]2 ][F (θ̂)]
2 as
F (θ̂) + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 [F (θ̂)]2. When θ̂ increases, both
4q(1−q)[1−[4q(1−q)]
2][4q(1−q)+λρ∗]2 and F (θ̂) strictly
increases. Hence,d{ 4q(1−q)[1−[4q(1−q)]
2]
[4q(1−q)+λρ∗]2][F (θ̂)]2}
dθ̂> 0. Furthermore, dF (θ̂)
dθ̂= f(θ̂). We then estab-
lish our claim.
31
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Proof of Proposition 5
Proof. If(1−α)ρα≥ θ2−4(1−q)
2−θ2 , then θ̂0
does not exist. Any reform with a value θ < θ2 must lead
to negative expected outcome. Hence, no reform is ex ante
beneficial, which implies θ̂∗
= θ2.
If(1−α)ρα
< θ2−4(1−q)2−θ̂ , then θ̂
0exists. dW
dθ̂�f(θ̂)
∣∣∣θ̂=θ̂
0> 0, but dW
dθ̂�f(θ̂)
∣∣∣θ̂=θ2
< 0 (because
(1−α)ρα
< θ2−4(1−q)2−θ̂ ), then there must exist a unique θ̂
∗∈ (θ̂
0, θ2) that solves
dW
dθ̂�f(θ̂) = 0.
Proof of Proposition 6
Proof. Suppose that an interior optimum with θ̂∗∈ (0, θ2)
exists. Define k ≡ [−dρ
∗
dθ̂�f(θ̂)].
Then the optimal condition is
υ ≡ α[θ̂ − 4(1− q)] + (1− α)ρ∗(θ̂ − 2)− (1− α)k∫ θ2θ̂
(2− θ)f(θ)dθ = 0. (16)
Apparently, dυdθ̂
= −ddWdθ̂f(θ̂)
dθ̂> 0. We now claim dυ
dα> 0. Taking first order derivative of υ
yields
dυ
dα= [θ̂ − 4(1− q)]− ρ∗(θ̂ − 2) + (1− α)dρ
∗
dα(θ̂ − 2)
+k
∫ θ2θ̂
(2− θ)f(θ)dθ − (1− α)∂k∂α
∫ θ2θ̂
(2− θ)f(θ)dθ.
It suffices to show k strictly decreases with α and q. Recall by
the proofs of previous results:
−dρ∗
dα=
ρ∗2[1−[4q(1−q)][4q(1−q)+λρ∗]2
[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ]·∣∣∣∣dλ(α)dα
∣∣∣∣ .Note −d
dρ∗
dθ̂
dα= −d
dρ∗dα
dθ̂. Hence, we now evaluate −dρ∗
dαwith respect to θ̂. We first rearrange it
as
−dρ∗
dα=
ρ∗2[1−[4q(1−q)][4q(1−q)+λρ∗]2
[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ]·∣∣∣∣dλ(α)dα
∣∣∣∣=
(1− ρ∗)[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]
2][4q(1−q)+λρ∗]2 ]
· [1− [4q(1− q)]
· ρ∗2
1− ρ∗· 1
[4q(1− q) + λρ∗]2.
By the proof of Lemma 2, (1−ρ∗)
[κ(θ̂)+1+4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2]
decreases with θ̂. We claim ρ∗2
1−ρ∗ ·
32
-
1[4q(1−q)+λρ∗]2 also decreases with θ̂. Evaluate it with respect
to θ̂ yields
ρ∗(2− ρ∗)dρ∗dθ̂
(1− ρ∗)2· 1
[4q(1− q) + λρ∗]2
+ρ∗2
1− ρ∗·
−2λdρ∗dθ̂
[4q(1− q) + λρ∗]3.
Because dρ∗
dθ̂< 0, we need to show (2−ρ∗)[4q(1−q)+λρ∗]−2λρ∗(1−ρ∗) >
0, which is obvious
because (2− ρ∗)[4q(1− q) + λρ∗]− 2λρ∗(1− ρ∗) = (2− ρ∗)[4q(1− q)
+ λρ∗]− λρ∗(2− 2ρ∗),and 2− ρ∗ > 2− 2ρ∗.
We further claim θ̂∗
decreases with q. To show that, we have to prove dυdq> 0. We
have
dυ
dq= 4α + (1− α)dρ
∗
dq(θ̂ − 2)− (1− α)dk
dq
∫ θ2θ̂
(2− θ)f(θ)dθ.
It would suffice to show dkdq< 0. We use the same technique
as above. We have
−dρ∗
dq=
4(2q−1)ρ∗(λρ∗+1)[4q(1−q)+λρ∗]2
[κ(θ̄) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ].
We then claim − ∂2ρ∗∂q∂θ̂
< 0. Rewrite −dρ∗dq
as
−dρ∗
dq=
1− ρ∗
[κ(θ̂) + 1 + 4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2 ]· 1
1− ρ∗· 4(2q − 1)ρ
∗(λρ∗ + 1)
[4q(1− q) + λρ∗]2.
Because 1−ρ∗
[κ(θ̂)+1+4q(1−q)[1−[4q(1−q)]2]
[4q(1−q)+λρ∗]2]
and 11−ρ∗ decreases with θ̂, we only need to show
ρ∗(λρ∗+1)[4q(1−q)+λρ∗]2
decreases with θ̂. Taking first order derivative of it with
respect to θ̂ yields
d ρ∗(λρ∗+1)
[4q(1−q)+λρ∗]2
dθ̂=
(2λρ∗ + 1)dρ
∗
dθ̂[4q(1− q) + λρ∗]2(1− ρ∗)
−2ρ∗(λρ∗ + 1)(1− ρ∗)[4q(1− q) + λρ∗]λdρ∗dθ̂
+ρ∗(λρ∗ + 1)[4q(1− q) + λρ∗]2 dρ∗dθ̂
(1− ρ∗)2[4q(1− q) + λρ∗]4
=
dρ∗
dθ̂
[4q(1− q) + λρ∗]3
×
[(2λρ∗ + 1)[4q(1− q) + λρ∗](1− ρ∗)− 2λρ∗(λρ∗ + 1)(1− ρ∗)
+ρ∗(λρ∗ + 1)[4q(1− q) + λρ∗]
].
By Lemma 2, dρ∗
dθ̂< 0. Hence, it remains to verify that the item in bracket
is positive. This
33
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is obvious because[(2λρ∗ + 1)[4q(1− q) + λρ∗](1− ρ∗)− 2λρ∗(λρ∗ +
1)(1− ρ∗)
+ρ∗(λρ∗ + 1)[4q(1− q) + λρ∗]
]> λρ∗ [(2λρ∗ + 1)(1− ρ∗)− 2(λρ∗ + 1)(1− ρ∗) + ρ∗(λρ∗ +
1)]
= λρ∗[−ρ∗ + ρ∗(λρ∗ + 1)] > 0.
Proof of Proposition 7
Proof. We examine how a higher upper support θ2 could affect
dW/dθ̂ for any given θ̂. When
the high-type politician is perfectly informed, a closed form
for ρ∗ is obtained as
ρ∗ = 1− α1− α
F (θ̂).
The first-order derivative of the welfare function is derived as
follows
dW
dθ̂=
1
θ2 + θ1
−αθ̂ − (1− α)ρ∗(θ̂ − 2)+(1− α)dρ∗/dθ̂f(θ̂)
∫ θ2θ̂
(θ − 2)f(θ)dθ
=
1
θ2 + θ1
{−αθ̂ + (1− α)[1− α(θ̂+θ1)
(1−α)(θ2+θ1) ](2− θ̂)+α(θ2−θ̂)
2[4− (θ2 + θ̂)]
}.
The optimal cutoff θ̂∗
is determined by the equation
υ = −αθ̂ + (1− α)[1− α(θ̂ + θ1)(1− α)(θ2 + θ1)
](2− θ̂) + α(θ2 − θ̂)2
[4− (θ2 + θ̂)] = 0.
By Lemma 4, υ strictly decreases with θ̂. We only need to show
∂υ∂θ2
> 0. Apparently,
(1−α)[1− α(θ̂+θ1)(1−α)(θ2+θ1) ](2− θ̂) increases with θ2. We
claim
α(θ2−θ̂)2
[4− (θ2 + θ̂)] increases withit as well. Taking first order
derivative of (θ2− θ̂)[4− (θ2 + θ̂)] yields 4− (θ2 + θ̂)− (θ2− θ̂)
=4− 2θ2 > 0, which completes the proof.
References
Alesina, Alberto and Guido Tabellini, “Bureaucrats or
Politicians? Part I: A Single
Policy Task,” American Economic Review, March 2007, 97 (1),
169–179.
Banks, Jeffrey S. and Joel Sobel, “Equilibrium Selection in
Signaling Games,”
Econometrica, May 1987, 55 (3), 647–61.
Biglaiser, Gary and Claudio Mezzetti, “Politicians’ decision
making with re-election
concerns,” Journal of Public Economics, December 1997, 66 (3),
425–447.
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Brandenburger, Adam and Ben Polak, “W