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

Listed author(s):
  • Robinson, James A.
  • Torvik, Ragnar
  • Verdier, Thierry

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0047272716302006
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 145 (2017)
Issue (Month): C ()
Pages: 243-252

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Handle: RePEc:eee:pubeco:v:145:y:2017:i:c:p:243-252
DOI: 10.1016/j.jpubeco.2016.11.014
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
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  11. Robin Burgess & Remi Jedwab & Edward Miguel & Ameet Morjaria & Gerard Padró i Miquel, 2015. "The Value of Democracy: Evidence from Road Building in Kenya," American Economic Review, American Economic Association, vol. 105(6), pages 1817-1851, June.
  12. Robinson, James A. & Torvik, Ragnar, 2009. "A political economy theory of the soft budget constraint," European Economic Review, Elsevier, vol. 53(7), pages 786-798, October.
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