Banking Investigate

Habit Formation, Strategic Extremism, And Debt Policy

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Executive Summary

The authors suggest a probabilistic voting model where voters' preferences for alternative public goods display habit formation. Current policies determine habit levels and in turn the future preferences of the voters. This allows the incumbent to act strategically in order to influence the probability of reelection. Comparing to a benchmark case of a certain reelection, they demonstrate that the incumbent's optimal policy features both a more polarized allocation between the alternative public goods and a debt bias.

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