Ideological Polarization, Sticky Information, and Policy Reforms

We develop a dynamic two-party political economy framework, in which parties seek to maximize vote share and face the trade-off between catering to their respective core constituencies on the one hand and ‘middle of the road’ voters with no partisan affiliation on the other hand. In contrast to ideology-driven individuals, ‘middle of the road’ voters care about the state of the economy in the sense that a policy reform is desirable for them when the fundamentals of the economy change. However, information is “sticky” in the sense that the process of information diffusion about the state of the economy, which is determined by some exogenous stochastic process, is imperfect. Contrary to conventional wisdom, we show that an increase in ideological polarization may enhance social welfare by mitigating the friction in information flow.

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