Policy by Contract: electoral cycles, parties and social pacts, 1974-2000

Formal policy agreements between governments and major peak associations-social pacts-are a useful way to explore issues of election-induced variation in economic policymaking. I argue that pacts are part of an electoral strategy for political parties. They are one way a party can convince voters that economic outcomes under its rule will be better than those under a challenger. I show that pacts can emerge as part of equilibrium behavior in a repeated game but only if the policymaker is sufficiently willing to work with unions. There is no reason for a pact to exist in the absence of electoral incentives. I hypothesize that pacts are more likely to be struck nearer to elections and with greater Left participation in government. Using an original dataset on social pacts in the OECD, 1974-2000, find evidence that the onset of pacts is related to elections, partisanship, and EMU convergence pressures.