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Uncertainty, Electoral Incentives and Political Myopia

  • Alessandra Bonfiglioli
  • Gino Gancia

We study the determinants of political myopia in a rational model of electoral accountability where political ability is ex-ante unknown and policy choices are not perfectly observable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians invest too little in costly policies with future returns in an attempt to signal high ability and increase their reelection probability. Contrary to the conventional wisdom, uncertainty reduces political myopia and may, under some conditions, increase social welfare. We use the model to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of our theory are consistent with a number of stylized facts and with a new empirical observation documented in this paper: aggregate uncertainty, measured by economic volatility, is associated to better fiscal discipline in a panel of 20 OECD countries.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 667.

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Date of creation: Oct 2012
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Handle: RePEc:bge:wpaper:667
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  1. Marco Buti & Alessandro Turrini & Paul Van den Noord & Pietro Biroli, 2010. "Reforms and re-elections in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 25, pages 61-116, 01.
  2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  3. Giacomo Ponzetto & Ugo Troiano, 2014. "Social Capital, Government Expenditures, and Growth," Working Papers 612, Barcelona Graduate School of Economics.
  4. Andrea Mattozzi & Antonio Merlo, 2007. "Political Careers or Career Politicians?," NBER Working Papers 12921, National Bureau of Economic Research, Inc.
  5. Giacomo A. M. Ponzetto, 2008. "Heterogeneous information and trade policy," Economics Working Papers 1296, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  6. John A., List & Daniel, Sturm, 2006. "How Elections Matter: Theory and Evidence from Environmental Policy," Discussion Papers in Economics 768, University of Munich, Department of Economics.
  7. Paola Conconi & Giovanni Facchini & Maurizio Zanardi, 2011. "Policymakers’ Horizon and Trade Reforms," Development Working Papers 311, Centro Studi Luca d\'Agliano, University of Milano.
  8. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  9. Drazen, Allan & Eslava, Marcela, 2010. "Electoral manipulation via voter-friendly spending: Theory and evidence," Journal of Development Economics, Elsevier, vol. 92(1), pages 39-52, May.
  10. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 645-673, 09.
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