Alternation and Cooperation in a Two-party System: Implications for Resource-Based Developing Economies

Abstract

This paper studies cooperation in a political system dominated by two opportunistic parties competing in a resource-based economy. Since a binding agreement as an external solution might be difficult to enforce due to the close association between the incumbent party and the government, the paper explores the extent to which co-operation between political parties that alternate in office can rely on self-enforcing strategies to provide an internal solution. We show that, for appropriate values of the probability of re-election and the discount factor cooperation in maintaining the value of a state variable is possible, but fragile. Another result is that, in such political framework, debt decisions contain an externality element linked to electoral incentives that creates a bias towards excessive borrowing.