ZΛJ
A final observation regards the robustness of co-operation. This is represented by the intensity
of the gradation from white to black. As the co-operative zone gets darker, co-operation is
more robust to small changes in the values of the incentives (values of parameters). This tends to
be more the case for the resourceful incumbent than for the poor one. To what extent can the
observations derived from the two calculations be generalised? In the absence of an analytical
solution to the ICC, what can be said is that these patterns can be taken as representative of the
behaviour of the co-operative solution of the game. The same qualitative results are obtained in
calculations made with intermediate values for the temptation, and in that sense they are robust.
4. Extensions
In this paper the only way of financing expenditure is through own revenues. This is a quite
restrictive an unrealistic assumption. For example, external borrowing is an important source to
finance deficits. Astorga (1996) works out the implications of the externality nature of
borrowing when decisions are made in a political framework characterised by alternation of
opportunistic parties. The main insight is that, facing an adverse or an even electoral contest, the
incumbent acting unilaterally will be always willing to contract debt to finance projects with high
political returns although these may not be justified on economic grounds. Another result
indicates that if parties are uncertain at the beginning of the game about who is going to contract
and spend the debt, they have an incentive to commit themselves to minimum borrowing. This
analysis could also be extended to a model where the state variable is the stock of capital
instead of the stock of reserves. However, this situation is of a greater level of complexity than
the one studied here due mainly to the reproductive nature of capital and the need to
differentiate between current and investment expenditure.
The model also offers some insight to the design of stabilisation funds. Stabilisation funds are an
institutional response to deal with external revenue volatility. In the absence of markets to cover
the risk involved, this solution implies a rule of saving and expenditure that provides a
mechanism of self-insurance. In this way most of the cost associated with stop-and-go economy
can be avoided if the economy is isolated from the instability and uncertainty of the main source
of income.