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To Be or Not To Be in Office Again: Political Business Cycles with Local Governments

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Author Info

  • Rui Nuno Baleiras

    (Universidade Nova de Lisboa-Portugal)

  • José da Silva Costa

    (Universidade do Porto-Portugal)

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 incumbent’s concern with her own welfare in cases of victory and defeat. This rationale addresses local policy-making in particular. An equilibrium perfect-foresight 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. The estimation of an error- components econometric framework finds evidence in favour of the proposed explanation during the period 1986 to 1993, and enlightens the role played by several politico-economic determinants of local governments’ investment outlays, such as electoral calendar, re- candidacy decisions, political cohesion and intergovernmental capital transfers.

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File URL: http://128.118.178.162/eps/pe/papers/0302/0302009.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0302009.

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Length: 28 pages
Date of creation: 25 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwppe:0302009

Note: Type of Document - Adobe pdf; prepared on PC; to print on HP compatible; pages: 28; figures: included. The final version of this working paper was accepted for publication on January 2003 by the European Journal of Political Economy.
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Web page: http://128.118.178.162

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

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