Downsian Model with Asymmetric Information: Possibility of Policy Divergence

This paper presents a model of Downsian political competition in which voters are imperfectly informed about economic fundamentals. In this setting, partiesfchoices of platforms influence votersf behavior not only through votersf preferences over policies, but also through formation of their expectation on the unknown fundamentals. We show that there exist pure-strategy equilibria in this political game with asymmetric information at which the two partiesf policies diverge with positive probability. This result is in contrast with the well-known median voter theorem in the classical model of Downsian competition. We also study refinement of equilibria, and identify the perfect equilibria (Selten, 1975) and the strictly perfect equilibria (Okada, 1981). The Nash equilibria with the strongest asymmetry in the partiesf strategies are proved to be strictly perfect.