Inflating the Beast: Political Incentives Under Uncertainty
AbstractThe standard view of the political economy of public debt is that myopic and unconstrained politicians prefer to disregard intertemporal smoothing considerations and extract political rents as fast as possible. From this perspective, it seems that the world has much to celebrate, as most emerging market economies -- often suspect of having weak political institutions -- have chosen to save rather than waste most of their exceptional income from high commodity prices. Unfortunately, the optimistic conclusion that these countries may have turned the corner with respect to public resource management may be premature. In this paper we show that while it is true that in the long run there is a negative connection between the level of public debt and the quality of political institutions, this needs not be the case in the short run. Quite the opposite, in the short run, governments with weak political institutions are likely to save more than governments with better institutions facing the same uncertainty. This is due to an option value of rent-seeking whereby the prospect of potentially squandering funds in the future makes governments more "precautionary" today. We show that this result relies on three assumptions: Economic risk is high relative to political risk, markets are sufficiently incomplete, and there exists a rent-less policy-making regime.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13779.
Date of creation: Feb 2008
Date of revision:
Note: EFG IFM POL
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CDM-2008-02-09 (Collective Decision-Making)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-POL-2008-02-09 (Positive Political Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chari, V V & Kehoe, Patrick J, 1993.
"Sustainable Plans and Mutual Default,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 175-95, January.
- Chari V. V. & Kehoe Patrick J., 1993.
"Sustainable Plans and Debt,"
Journal of Economic Theory,
Elsevier, vol. 61(2), pages 230-261, December.
- Alesina, Alberto & Tabellini, Guido, 1990.
"A Positive Theory of Fiscal Deficits and Government Debt,"
Review of Economic Studies,
Wiley Blackwell, vol. 57(3), pages 403-14, July.
- Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
- Alberto Alesina & Roberto Perotti, 1994.
"The Political Economy of Budget Deficits,"
IMF Working Papers
94/85, International Monetary Fund.
- Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2007.
"Political Economy of Mechanisms,"
CAS_RN_2007_2, Laboratory for Macroeconomic Analysis.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Ricardo Caballero & Stavros Panageas, 2005. "A Quantitative Model of Sudden Stops and External Liquidity Management," NBER Working Papers 11293, National Bureau of Economic Research, Inc.
- Lizzeri, Alessandro, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 909-28, October.
- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
"Optimal Taxation without State-Contingent Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 110(6), pages 1220-1254, December.
- Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski, 2009.
"Political Economy of Ramsey Taxation,"
NBER Working Papers
15302, National Bureau of Economic Research, Inc.
- Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 467-475, August.
- Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7), pages 467-475.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.