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Fiscal Policy, Rent Seeking and Growth under Electoral Uncertainty Theory and Evidence from the OECD

  • Konstantinos Angelopoulos
  • George Economides

We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties can alternate in power according to an exogenous reelection probability. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent-seeking activities; then distorted incentives hurt growth. This receives empirical support in a dataset of 25 OECD countries over the period 1982-1996. In particular, electoral uncertainty leads to larger government consumption shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth. Actually, estimation by IV methods and confidence intervals that are robust to (potentially) weak instruments, reveal that OLS under-estimates the effects of government spending on rent extraction activities and of such activities on economic growth.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_28.

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Date of revision: Apr 2008
Handle: RePEc:gla:glaewp:2007_28
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