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The dynamics of public investment under persistent electoral advantage

Listed author(s):
  • Marina Azzimonti-Renzo

This paper studies the effects of asymmetries in re-election probabilities across parties on public policy and its subsequent propagation to the economy. The struggle between opposing groups — that disagree on the composition of public consumption — results in governments being endogenously short-sighted: Systematic under investment in infrastructure and overspending on public goods arise, as resources are more valuable when in power. Because the party enjoying an electoral advantage is relatively less short-sighted, it devotes a larger proportion of government revenues to productive public investment. Political turnover, together with asymmetric policy choices, induces economic fluctuations in an otherwise deterministic environment. The author characterizes the long-run distribution of capital and shows that output increases on average with political advantage, despite the fact that the size of the government expands as a percentage of GDP. Volatility, on the other hand, is non-monotonic in political power and is an additional source of inefficiency.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-23.

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Date of creation: 2011
Handle: RePEc:fip:fedpwp:11-23
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