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A Test of the Rational Electoral-Cycle Hypothesis

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  • Pettersson Lidbom, Per

    ()
    (Dept. of Economics, Stockholm University)

Abstract

This paper develops a three-step empirical methodology to test the rational electoralcycle hypothesis. The first step consists of testing for the existence of electoral cycles in fiscal policy. The second step conducts three tests for how such cycles should depend on election outcomes as suggested by recent political agency models. The third step is to regress electoral success on fiscal policy. This three-step approach is applied to a panel of Swedish local governments with more than 2000 observations from elections. The findings are as follows: (i) spending is raised and taxes are cut in the election year, (ii) in the election year, spending is higher for a government that will be re-elected as compared to those that will not be re-appointed, (iii) in the post-election year, spending is higher and taxes are lower for re-elected governments than for newly elected ones, (iv) reelected governments spend less and tax more in the post-election year as compared to the election year, (v) conditional on taxes, spending is positively related to electoral success. These set of findings are consistent with Rogoff’s equilibrium budget cycle model where a government signals its competence through cycles in fiscal policy.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2003:16.

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Length: 27 pages
Date of creation: 17 Dec 2003
Date of revision:
Handle: RePEc:hhs:sunrpe:2003_0016

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Related research

Keywords: political agency; electoral budget cycles; accountability;

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References

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  1. David S. Bizer & Steven N. Durlauf, 1990. "Testing the Positive Theory of Government Finance," NBER Working Papers 3349, National Bureau of Economic Research, Inc.
  2. Pettersson-Lidbom , Per, 2003. "Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach," Research Papers in Economics 2003:15, Stockholm University, Department of Economics.
  3. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  4. Steven D. Levitt, 1995. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Policeon Crime," NBER Working Papers 4991, National Bureau of Economic Research, Inc.
  5. Reid, Bradford G, 1998. " Endogenous Elections, Electoral Budget Cycles and Canadian Provincial Governments," Public Choice, Springer, vol. 97(1-2), pages 35-48, October.
  6. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  7. Gabor Kezdi, 2005. "Robus Standard Error Estimation in Fixed-Effects Panel Models," Econometrics 0508018, EconWPA.
  8. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  9. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
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Citations

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Cited by:
  1. Matz Dahlberg & Eva Mörk, 2011. "Is There an Election Cycle in Public Employment? Separating Time Effects from Election Year Effects," CESifo Economic Studies, CESifo, vol. 57(3), pages 480-498, September.
  2. Gonzales, Paula & Hindriks, Jean & Lockwood, Ben & Porteiro, Nicolas, 2006. "Political Budget Cycles and Fiscal Decentralization," The Warwick Economics Research Paper Series (TWERPS) 742, University of Warwick, Department of Economics.
  3. Nuno Ribeiro & Susana Jorge & Mercedes Cervera, 2013. "Estudo do Endividamento da Administração Local Portuguesa: Evidência Empírica USando Modelos de Análise de Dados em Painel," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 38, pages 46-67, December.
  4. Pettersson-Lidbom , Per, 2003. "Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach," Research Papers in Economics 2003:15, Stockholm University, Department of Economics.
  5. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
  6. Leonardo Martinez, 2008. "A theory of political cycles," Working Paper 05-04, Federal Reserve Bank of Richmond.
  7. Pettersson Lidbom, Per, 2003. "Does the Size of the Legislature Affect the Size of Government? Evidence from a Natural Experiment," Research Papers in Economics 2003:18, Stockholm University, Department of Economics.

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