Candidate Entry, Screening, and the Political Budget Cycle

We investigate whether relevant private information about citizens’ competence in political office can be credibly revealed by their entry and campaign expenditure decisions, as opposed to choice of policy once in office. We find that this depends on whether voters and candidates have common or conflicting interests; only in the former case can entry be revealing in equilibrium. We apply these results to Rogoff’s (1990) model of the political budget cycle, allowing for candidate entry, as well as elections: as interests are common, low-ability candidates are screened out at the entry stage, and so there is no signaling via fiscal policy (i.e. no “political budget cycle”). In a variant of the Rogoff model where citizens differ in honesty, rather than ability, interests are conflicting, and so the political budget cycle can persist in equilibrium.