Taxes , Public Goods and Policies of ( In ) Competent Politicians ∗

This paper examines the equilibrium relationship between politics and the economy. I consider a repeated-election model with policy and office motivated politicians. The incumbent politician chooses a tax rate and oversees the activities of the private and public sectors. Politicians differ in their ability to increase the productivity of the private sector, and in their ability to transform tax revenues into public goods. Voters differ in their productivities and tastes. I solve for the stationary equilibrium of the model and show how each underlying characteristic of the heterogeneous agents affects: policy choices, voting behavior, the output of the private and public sectors, and welfare of different voters. In equilibrium, the politician’s ability defines both her budget and political constraints; the combined effect of these constraints endogenously displaces competence as a valence issue. I also present a mechanism through which economic growth may foster the selection of better office holders. JEL classification: D72, H31, H41.