Policy competition, Infrastructure investment, Lobbying, Spatial model, H11, H54, H76, H77, R53,

This paper explores an agent's behavior when he values a large budget, and when his effort in one period affects the budget he gets in the following period. In particular, we shall see that the agent who works little, or takes insufficient care, may enjoy a large budget. That in turn can lead to costly projects. For example, in 2006 during construction of the Big Dig in Boston, a concrete ceiling panel and debris weighing 24,000 kg fell on a car, killing a passenger (Flint, 2015). The project suffered from faulty epoxy, light fixtures dropping, and seawater leaks. But rather than canceling or downsizing the project, the cost ballooned from $2.6 billion to nearly $15 billion. Cost overruns exceeding $1 billion at the Veterans Affairs hospital in Colorado arose in large part because of a design that often sacrificed affordability in the name of aesthetics (Matthews, 2016). Such behavior often has the characteristic of "throwing good money after bad." Consider an example from Kenya (Human Rights House Foundation, 2007

Consider a principal who sets a budget that the agent allocates among different services. Because the preferences of the agent may differ from those of the principal, the budget the principal sets can be lower or higher than in the first-best solution. When the principal is uncertain about the agent's preferences, the agent may choose an allocation that signals his type, thereby affecting the size of the budget the principal will set in the following period. The equilibrium may have separation or pooling. In a pooling equilibrium, the agent may misrepresent his preferences, aiming to get a large budget in the future period.

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