Abstract
This paper provides a moral hazard theory of the cyclical pattern of the approval of laws and decrees during a legislature. We study a political environment with three agents and two sources of asymmetric information. The agents are the legislator, uninformed voters and a special interest group. The special interest group differs from unorganized voters for their superior information and unique ability to transfer resources to the legislator. In return from votes from unorganized voters and votes and resources from the special interest group, the legislator provides two types of goods with different redistributive profiles: a general public good that benefits all agents and a targeted good that benefits only the special interest group. To produce them he must pass legislation either in the form of laws, visible to all agents, or decrees, visible only to the special interest group; this is the first source of asymmetric information. The second asymmetry of information refers to the competence of the legislator, which only he knows ex ante, and drives his re-election strategy. To separate himself from less competent challengers and maximize his re-election probabilities, the competent legislator must boost the supply of the general public good at the end of the legislature, which determines a peak in the production of laws that also voters can see and reward with votes. To generate this boost the competent legislator needs beforehand to obtain resources from the special interest group, supplying the targeted good they demand. This generates a higher than average supply of targeted goods in the early stages of the legislature that requires the approval of a larger number of decrees, which only the interest group can see. The prediction of two opposite cycles of decrees and laws at different stages of the legislature match the findings of the empirical literature, which detects a decree cycle at the beginning of the legislature and a law cycle at its end.