A theory of political cycles

"The literature on political cycles argues that the proximity of elections affects policy choices. This literature considers that opportunistic policymakers manipulate policy to increase their reelection probability. Previous theoretical studies assume that the policymaker can affect his reelection probability only with his last decision before the election. This assumption seems extreme, and directly produces a cycle without presenting a theory of why a policymaker's behavior is different closer to the election. We shall explain how, without this assumption, existing political-agency models can still produce cycles. In contrast to previous (theoretical and empirical) studies, we consider how the policymaker's decisions depend on his reputation (the beliefs about his future performance). Since the policymaker's reputation most likely changes over time, in general, one cannot conclude from observing the same behavior throughout the policymaker's term that the proximity of elections does not affect policy choices. Consequently, our findings suggest reinterpreting previous empirical results and controlling for changes in reputation in future empirical studies. More generally, our results deepen the understanding of agency relationships in which the agent℗s compensation is decided infrequently."--Federal Reserve Bank of Richmond web site.