LAUSR

This paper characterizes the solution to differential games in the context of electoral competition between two political parties/politicians, in the presence of voters and a special interest group. The basic structure of the analytical model is similar to Lambertini (https://amsacta.unibo.it/4884/1/415.pdf, 2001, Dynamic games in economics. Springer, Berlin, pp 187–204, 2014), which is extended to model the involvement of a special interest group. Furthermore, voters not only vote but also care for the level of public good provision, while the interest group cares for the regulatory benefit in exchange for financial contribution for campaign expenditure. With a quadratic cost structure, we find that a closed-loop solution collapses to an open-loop equilibrium. Moreover, at the private optimum, the expenditure offered for public good provision, regulatory benefit rendered, voting support from voters, and financial contributions from special interest group received by any political party are always higher than at the social optimum. That is, political parties have the tendency to make excessive offers of expenditure on public good to grab a larger vote share to win the election. Consequently, voters vote retrospectively to the party that offers to overspend more. A higher private optimal regulatory benefit helps the political parties to receive higher financial contributions, which could be potentially used for election campaigns and indirectly contributes to enhance their vote share. The solutions to the control and state variables constitute steady-state saddle point equilibria at both private and social optima.