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Making rules credible: divided government and political budget cycles

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  • Jorge Streb
  • Gustavo Torrens

Abstract

Political budget cycles (PBCs) can result from the credibility problems office-motivated incumbents face under asymmetric information, due to the temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit public debt, because borrowing is a necessary condition for aggregate PBCs. Since the legislature must typically authorize new debt, divided government can make these fiscal rules credible. Commitment is undermined by either unified government or imperfect compliance with the budget law, which can help explain why PBCs are stronger in developing countries and in new democracies. When divided government affects efficiency, voters must trade off electoral distortions and government competence. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Jorge Streb & Gustavo Torrens, 2013. "Making rules credible: divided government and political budget cycles," Public Choice, Springer, vol. 156(3), pages 703-722, September.
    • Handle: RePEc:kap:pubcho:v:156:y:2013:i:3:p:703-722
    DOI: 10.1007/s11127-012-9923-2
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    More about this item

    Keywords

    Political budget cycles; Unified government; Rules; Credibility; Divided government; D72; D78; H60;
    All these keywords.

    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
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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