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Political Budget Cycles and Fiscal Decentralization

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  • Paula González

    () (Department of Economics, Universidad Pablo de Olavide)

  • Jean Hindriks

    () (Université Catholique de Louvain, CORE.)

  • Ben Lockwood

    () (University of Warwick.)

  • Nicolás Porteiro

    () (Department of Economics, Universidad Pablo de Olavide)

Abstract

In this paper, we study a model à la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.

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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 06.13.

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Length: 36 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:pab:wpaper:06.13

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Keywords: Political Agency Models; decentralization; incentives; selection; fiscal distortion.;

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References

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  1. Persson, Torsten & Tabellini , Guido, 1997. "Political Economics and Macroeconomic Policy," Seminar Papers 630, Stockholm University, Institute for International Economic Studies.
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  16. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
  17. HINDRIKS, Jean & LOCKWOOD, Ben, 2004. "Centralization and political accountability," CORE Discussion Papers 2004052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Vergne, Clémence, 2009. "Democracy, elections and allocation of public expenditures in developing countries," European Journal of Political Economy, Elsevier, vol. 25(1), pages 63-77, March.

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