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Fiscal Policy, Rent Seeking and Growth under Electoral Uncertainty Theory and Evidence from the OECD

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  • Konstantinos Angelopoulos
  • George Economides

Abstract

We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties can alternate in power according to an exogenous reelection probability. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent-seeking activities; then distorted incentives hurt growth. This receives empirical support in a dataset of 25 OECD countries over the period 1982-1996. In particular, electoral uncertainty leads to larger government consumption shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth. Actually, estimation by IV methods and confidence intervals that are robust to (potentially) weak instruments, reveal that OLS under-estimates the effects of government spending on rent extraction activities and of such activities on economic growth.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_28.

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Date of revision: Apr 2008
Handle: RePEc:gla:glaewp:2007_28

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Keywords: Fiscal policy; rent seeking; economic growth; elections.;

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Citations

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Cited by:
  1. Bjørnskov, Christian & Potrafke, Niklas, 2012. "Political ideology and economic freedom across Canadian provinces," Munich Reprints in Economics 20277, University of Munich, Department of Economics.
  2. Margarita Katsimi & Vassilis Sarantides, 2012. "Do elections affect the composition of fiscal policy in developed, established democracies?," Public Choice, Springer, vol. 151(1), pages 325-362, April.
  3. Niklas Potrafke, 2006. "Political Effects on the Allocation of Public Expenditures: Empirical Evidence from OECD Countries," Discussion Papers of DIW Berlin 653, DIW Berlin, German Institute for Economic Research.
  4. Angelopoulos, Konstantinos & Economides, George & Kammas, Pantelis, 2009. "Do political incentives matter for tax policies? Ideology, opportunism and the tax structure," SIRE Discussion Papers 2009-09, Scottish Institute for Research in Economics (SIRE).
  5. Niklas Potrafke, 2010. "Does government ideology influence budget composition? Empirical evidence from OECD countries," Working Paper Series of the Department of Economics, University of Konstanz 2010-16, Department of Economics, University of Konstanz.
  6. Niklas Potrafke, 2012. "Political cycles and economic performance in OECD countries: empirical evidence from 1951–2006," Public Choice, Springer, vol. 150(1), pages 155-179, January.
  7. Niklas Potrafke, 2010. "Ideology and cultural policy," TWI Research Paper Series 49, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  8. Margarita Katsimi & Vassilis Sarantides, 2010. "Do Elections Affect the Composition of Fiscal Policy?," CESifo Working Paper Series 2908, CESifo Group Munich.

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