This paper structurally estimates a dynamic model of fund-raising, campaign spending, and accumulation of war chest with unobserved candidate quality. We present an identification strategy similar to the one developed in the context of production function estimation that allows us to recover the quality (vote-getting ability) of the candidates. In our counterfactual experiment, we consider the equilibrium effects of government subsidies to challengers. We find that the subsidies substantially crowd out the challenger’s fund-raising and increase the incumbent’s fund-raising. Analysis that ignores these equilibrium effects substantially overestimates the effect of the policy.
Kei Kawai is an Assistant Professor of Economics at UC Berkeley.