Resource Windfalls and Public Debt: The Role of Political Myopia

We identify an adverse consequence of natural resource windfalls, which is partic-ularly detrimental in advanced democracies. We construct a political economy modelwith endogenous public debt under exogenous resource windfall shocks, in which po-litical myopia results from reelection prospects. Reelection-seeking politicians, whilemore accountable toward their electorate, are also more myopic. The latter e ectgives rise to a budget de cit bias, with the ensuing debt buildup that is exacerbatedby resource windfalls. We nd that the positive e ect of resource windfalls on debtincreases as the restrictions on reelection get laxer. We test the model's predictionsusing a panel of U.S. states over the period 1963-2007. Our identi cation strategyrests on constitutionally-entrenched di erences in gubernatorial term limits that pro-vide plausibly exogenous cross-sectional and time variation in political time horizon,and geographically-based cross-state di erences in natural endowments interacted withthe international prices of oil and gas. The empirical ndings corroborate the model'spredictions. In particular, our baseline estimates indicate that a resource windfall of$1 induces an increase of approximately g14:7 in the public debt of states with nogubernatorial term limits.