This Paper uses a large new panel data set to examine the relationship between elections and fiscal policy. We find clear evidence of political business cycles in macroeconomic policy: spending increases before elections while revenues fall, leading to a larger deficit in election years. We also show that there are large systematic differences between developed and developing countries in the size and composition of the electoral policy cycles. We propose a moral hazard model of electoral competition to explain these differences. In the model, the sizes of the electoral budget cycles depend on the rents of remaining in power and the share of informed voters in the electorate. Using suitable proxies, we find that these institutional features explain a large part of the difference in policy cycles between developed and developing countries.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3352.
Find related papers by JEL classification: D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
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