Rational inattention and politics: how parties use fiscal policies to manipulate voters

We model a two-party electoral game with rationally inattentive voters. Parties are endowed with diferent administrative competencies and announce a fscal platform to be credibly implemented in case of electoral success. The budgetary impact of each platform depends on the party’s competence and on a stochastic implementation shock. Voters rely on the announced platform to infer a party’s unobserved competence. In addition, voters receive noisy signals on the impact of each fscal platform with noise depending ultimately on a voter’s cognitive skills. We predict that the interplay between the desire of parties to win the election (the incentive to manipulate voters’ beliefs) and voters’ (lack of) cognitive skills (the scope for manipulation) distorts fscal policies towards excessive budget defcits. The mechanism is that parties attempt to manipulate inferences on their competencies by implementing a loose fscal policy. The predictions are tested empirically on a sample of advanced economies over years 1999–2008. Our results remain stable after controlling for potentially confounding diferences across countries and over time, along with unobserved heterogeneity. Finally, alternative mechanisms potentially driving our results are investi gated and ruled out.