Legislative Bargaining and Incremental Budgeting

The notion of 'incrementalism', formulated by Aaron Wildavsky in the 1960's, has been extremely influential in the public budgeting literature. In essence, it entails the claim that legislators engaged in budgetary policymaking accept past allocations, and decide only on the allocation of increments to revenue. Wildavsky explained incrementalism with reference to the cognitive limitations of lawmakers and their desire to reduce conflict. This paper uses a legislative bargaining framework to undertake a formal analysis of incremental budgeting. An exogenously chosen agenda setter proposes budgets and seeks to build coalitions to secure passage, over multiple periods. The central result is that the agenda setter can lower her cost of building a winning coalition, and thereby raise her payoff, by following an incrementalist strategy, which involves maintaining the same coalition every period. First, it is shown within a simple 2-period model that there exist subgame perfect 'incremental budgeting' equilibria of this nature. If the agenda setter is assumed to be able to commit to the 'grandfathering' of past allocations, the unique subgame perfect equilibrium (up to the choice of the coalition members) involves incremental budgeting. The model is then extended to an infinitely repeated setting, and it is shown that the agenda setter's incentives for incremental budgeting are reinforced in this context. Some testable implications (relating incrementalism to various characteristics of the legislature) are also derived. Finally, the implications for incrementalism of heterogeneity among legislators are analyzed.