Government turnover in parliamentary democracies (Q1590051)

In this paper is proposed a two-period model of government formation and termination where political parties care about both policy and transfers. In each period two (publicly observable) shocks are realized. A policy shock determines the ``fault policy'' that would be implemented if no goverment forms in that period. A public opinion shock determines the electoral prospects of all parties if the parliament were dissolved and an election held immediately. After observing the realization of the shocks, the political parties negotiate over policy and transfers. If no government is in power, this negotiation takes the form of a government formation process where a party is selected to try to form of a new government. If a government is already in power, parties negotiate over whether to preserve the current government, and possibly ''reshuffle'' the allocation of benefits, or terminate it. If a government is terminated, a decision is made whether immediately to form a new government. The authors' theoretical framework is capable of generating the stylized facts enumerate above. The main findings can be summarized as follows. First, all types of governments (i.e., minority, minimal winning, and surplus governments) can form in equilibrium. Second, government reshuffles, replacements, and dissolutions can occur in equilibrium. Third, only minority governments can terminate in equilibrium. Since the model is a game with complete information and a finite horizon, the authors focus on the characterization of its subgame perfect equilibrium using backward induction. The characterization is presented in a series of lemmata which illustrate the main properties of the equilibrium of each subgame. A proposition containing the main result of the paper concludes the analysis. All proofs are given in the Appendix.