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To Be or Not To Be in Office Again, That is the Question: Political Business Cycles with Local Governments

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  • Baleiras, Rui Nuno
  • Costa, Jose da Silva

Abstract

Most opportunistic -type models of political business cycles tend to posit a given objective for incumbents: maximisation of re-election chances. Though taking an opportunistic view too, we suggest a new explanation for a fiscal policy cycle: the incumbents concern with her own welfare in cases of victory and defeat. This rationale addresses local policy-making in particular. An equilibrium perfectforesight model is designed which totally dispenses with any form of irrationality (namely, on the part of voters) or the common objective functions (re-election chances). Being well grounded in basic microeconomic theory (welfare maximisation by the individual agent), our model provides another foundation for the emergence of political business cycles at the local level. The empirical plausibility of theoretical predictions is then tested on Portuguese municipal data ranging from 1977 to 1993. The estimation of an error-components econometric framework finds evidence in favour of the proposed explanation and enlightens the role played by several politicoeconomic determinants of local governments investment outlays, such as electoral calendar, re-candidacy decisions, political cohesion and intergovernmental capital transfers.

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Bibliographic Info

Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp402.

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Length: 28 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:unl:unlfep:wp402

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Keywords: local public finance; public choice; political business cycles; elections; Portugal;

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  1. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, December.
  2. Alesina, Alberto & Roubini, Nouriel, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 663-88, October.
  3. Blais, Andre & Nadeau, Richard, 1992. " The Electoral Budget Cycle," Public Choice, Springer, vol. 74(4), pages 389-403, December.
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  9. Persson, Torsten & Roland, Gerard & Tabellini, Guido, 1998. "Towards micropolitical foundations of public finance," European Economic Review, Elsevier, vol. 42(3-5), pages 685-694, May.
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  11. W. Robert Reed, 1994. "A Retrospective Voting Model With Heterogeneous Politicians," Economics and Politics, Wiley Blackwell, vol. 6(1), pages 39-58, 03.
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  13. Kenneth Rogoff, 1990. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  14. Frey, Bruno S & Schneider, Friedrich, 1978. "An Empirical Study of Politico-Economic Interaction in the United States," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 174-83, May.
  15. Pereira, Paulo T C, 1996. " A Politico-economic Approach to Intergovernmental Lump-Sum Grants," Public Choice, Springer, vol. 88(1-2), pages 185-201, July.
  16. Nuno Baleiras, Rui, 1997. "Electoral defeats and local political expenditure cycles," Economics Letters, Elsevier, vol. 56(2), pages 201-207, October.
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Cited by:
  1. Linda Veiga & Francisco Veiga, 2007. "Political business cycles at the municipal level," Public Choice, Springer, vol. 131(1), pages 45-64, April.

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