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A Test of the Rational Electoral-Cycle Hypothesis

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  • Pettersson Lidbom, Per

    () (Dept. of Economics, Stockholm University)

Abstract

This paper develops a three-step empirical methodology to test the rational electoralcycle hypothesis. The first step consists of testing for the existence of electoral cycles in fiscal policy. The second step conducts three tests for how such cycles should depend on election outcomes as suggested by recent political agency models. The third step is to regress electoral success on fiscal policy. This three-step approach is applied to a panel of Swedish local governments with more than 2000 observations from elections. The findings are as follows: (i) spending is raised and taxes are cut in the election year, (ii) in the election year, spending is higher for a government that will be re-elected as compared to those that will not be re-appointed, (iii) in the post-election year, spending is higher and taxes are lower for re-elected governments than for newly elected ones, (iv) reelected governments spend less and tax more in the post-election year as compared to the election year, (v) conditional on taxes, spending is positively related to electoral success. These set of findings are consistent with Rogoff’s equilibrium budget cycle model where a government signals its competence through cycles in fiscal policy.

Suggested Citation

  • Pettersson Lidbom, Per, 2003. "A Test of the Rational Electoral-Cycle Hypothesis," Research Papers in Economics 2003:16, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2003_0016
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    References listed on IDEAS

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    1. Gabor Kezdi, 2005. "Robus Standard Error Estimation in Fixed-Effects Panel Models," Econometrics 0508018, EconWPA.
    2. Reid, Bradford G, 1998. "Endogenous Elections, Electoral Budget Cycles and Canadian Provincial Governments," Public Choice, Springer, vol. 97(1-2), pages 35-48, October.
    3. Bizer, David S. & Durlauf, Steven N., 1990. "Testing the positive theory of government finance," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 123-141, August.
    4. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
    5. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
    6. Pettersson-Lidbom , Per, 2003. "Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach," Research Papers in Economics 2003:15, Stockholm University, Department of Economics.
    7. Levitt, Steven D, 1997. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime," American Economic Review, American Economic Association, vol. 87(3), pages 270-290, June.
    8. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
    9. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
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    Citations

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    Cited by:

    1. Pettersson-Lidbom , Per, 2003. "Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach," Research Papers in Economics 2003:15, Stockholm University, Department of Economics.
    2. Dahlberg, Matz & Mörk, Eva, 2008. "Is There an Election Cycle in Public Employment? Separating Time Effects from Election Year Effects," Discussion Papers 444, VATT Institute for Economic Research.
    3. Martinez, Leonardo, 2009. "A theory of political cycles," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1166-1186, May.
    4. Gonzalez, Paula & Hindriks, Jean J.G. & Lockwood, Ben & Porteiro, Nicolas, 2006. "Political Budget Cycles and Fiscal Decentralization," CEPR Discussion Papers 5646, C.E.P.R. Discussion Papers.
    5. Matz Dahlberg & Eva Mörk, 2011. "Is There an Election Cycle in Public Employment? Separating Time Effects from Election Year Effects," CESifo Economic Studies, CESifo, vol. 57(3), pages 480-498, September.
    6. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    7. Foremny, Dirk & Riedel, Nadine, 2014. "Business taxes and the electoral cycle," Journal of Public Economics, Elsevier, vol. 115(C), pages 48-61.
    8. Pettersson Lidbom, Per, 2003. "Does the Size of the Legislature Affect the Size of Government? Evidence from a Natural Experiment," Research Papers in Economics 2003:18, Stockholm University, Department of Economics.
    9. Nuno Ribeiro & Susana Jorge & Mercedes Cervera, 2013. "Estudo do Endividamento da Administração Local Portuguesa: Evidência Empírica USando Modelos de Análise de Dados em Painel," Notas Económicas, Faculty of Economics, University of Coimbra, issue 38, pages 46-67, December.

    More about this item

    Keywords

    political agency; electoral budget cycles; accountability;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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