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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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Author Info
Baleiras, Rui Nuno
Costa, Jose da Silva

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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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Publisher 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
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Handle: RePEc:unl:unlfep:wp402

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

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
R51 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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  1. William D. Nordhaus, 1989. "Alternative Approaches to the Political Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1989-2), pages 1-68. [Downloadable!]
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  2. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March. [Downloadable!] (restricted)
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  3. Schuknecht, Ludger, 2000. " Fiscal Policy Cycles and Public Expenditure in Developing Countries," Public Choice, Springer, vol. 102(1-2), pages 115-30, January. [Downloadable!] (restricted)
  4. Schuknecht, Ludger, 1999. "Fiscal policy cycles and the exchange rate regime in developing countries," European Journal of Political Economy, Elsevier, vol. 15(3), pages 569-580, September. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May. [Downloadable!] (restricted)
  7. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. 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.
  9. Alesina, Alberto & Roubini, Nouriel, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Blackwell Publishing, vol. 59(4), pages 663-88, October. [Downloadable!] (restricted)
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  10. Nuno Baleiras, Rui, 1997. "Electoral defeats and local political expenditure cycles," Economics Letters, Elsevier, vol. 56(2), pages 201-207, October. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  12. Blais, Andre & Nadeau, Richard, 1992. " The Electoral Budget Cycle," Public Choice, Springer, vol. 74(4), pages 389-403, December.
  13. Suzuki, Motoshi, 1994. " Evolutionary Voter Sophistication and Political Business Cycles," Public Choice, Springer, vol. 81(3-4), pages 241-61, December.
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  1. Francisco José Veiga & Linda Gonçalves Veiga, 2004. "Political Business Cycles at the Municipal Level," NIPE Working Papers 4/2004, NIPE - Universidade do Minho. [Downloadable!]
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