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The political economy of public income volatility: With an application to the resource curse

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  • Robinson, James A.
  • Torvik, Ragnar
  • Verdier, Thierry

Abstract

In recent years many countries have witnessed a great deal of volatility in public budgets, be it due to volatility in the access to foreign loans in Greece, or to unstable oil prices in Venezuela. We study the political consequences of such public income volatility. As is standard, in our model political incentives create inefficient policies to increase re-election probabilities, but we show that making public income uncertain creates specific new effects. Future volatility reduces the benefit of being in power, making policy more efficient. Yet at the same time it also reduces the re-election probability of an incumbent and since some of the policy inefficiencies are concentrated in the future, this makes inefficient policy, such as patronage public employment, less costly. Our model highlights a new political economy connection between the volatility of the public budget and economic growth. In the case where volatility comes from natural resource prices, a characteristic of many developing countries, we show that volatility in itself may be a source of inefficient resource extraction, jointly interacting with increased patronage employment.

Suggested Citation

  • Robinson, James A. & Torvik, Ragnar & Verdier, Thierry, 2017. "The political economy of public income volatility: With an application to the resource curse," Journal of Public Economics, Elsevier, vol. 145(C), pages 243-252.
  • Handle: RePEc:eee:pubeco:v:145:y:2017:i:c:p:243-252
    DOI: 10.1016/j.jpubeco.2016.11.014
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    Cited by:

    1. Hilde C. Bjørnland & Leif Anders Thorsrud & Ragnar Torvik, 2018. "Dutch disease dynamics reconsidered," Working Paper 2018/1, Norges Bank.
    2. Ragnar Torvik, 2017. "Should Developing Countries Establish Petroleum Funds?," Working Papers No 3/2017, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    3. repec:bla:pbudge:v:37:y:2017:i:2:p:35-57 is not listed on IDEAS
    4. Solé-Ollé, Albert & Viladecans-Marsal, Elisabet, 2017. "Housing booms and busts and local fiscal policy," ZEW Discussion Papers 17-001, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. repec:gam:jeners:v:10:y:2017:i:10:p:1578-:d:114746 is not listed on IDEAS

    More about this item

    Keywords

    Income volatility; Public policy; Politics; Resource extraction;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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