equilibrium. Also, as will be presented later on in the chapter, a co-operative behaviour will
require that the level of reserves will be kept constant at a certain level. 11
The stationary state
During the stationary state the incumbent sets xt = r. Vt, in which case
Ilt = Ii+1 = I't+2 = Is for i = 0 and 1; δt+ i = δt+ i+1 = δs = δ (W, μ) V i ; where the
t t I t I t t i t i i I s
symbol S is used to mean stationary state. Also, p(r) = q(r), i.e., it is expected that for a
given expenditure both parties will obtain the same probability of re-election and will implement
the same strategy once in office. The time ts at which xt = r, depends on the path followed by
the incumbents as reflected in the history of the game ht.
Regarding the incumbent party at time ts (which it is assumed to be Party I), the continuation
pay-off becomes:
(5) 11 s = p(r) δs. 11 s i [1 - p(r)]δs. 10s i K
10s = [1 - q(r)]δs.11 s I q(r) δs.10s
∩v [1 - q ( r )] δ ιv
(6) 10S = l -Z у 7-1 s 11S
[1 - q ( r ) δs ]
After substituting (6) into (5), I find the expression for the total expected pay-off for the
incumbent party in the stationary state:
[1 - p ( r ) δs ] K
(7) I1s
(1 - δs )[11 δs - 2 δs.p(r )]
On the other hand, following a similar procedure, I obtain the expected pay-off at time ts for the
party in opposition (Party II).
(8) II0s = [1 - p(r)]δs.II1 s i p(r)δ.II0s
II1 s = q(r ) δs. II1 s I [1 - q(r )]δs. II0s IK
11 Regarding the analysis on uniqueness and stability of the game, it can be shown that there is
convergence towards a unique stationary state for the level of reserves ( WE ), and that the system is stable
in the sense that for an amount of reserves different than WE , the incumbent changes the level of the
stock generating a move in the direction of the equilibrium position. See Astorga, 1996.