Inflating the Beast: Political Incentives Under Uncertainty
The standard view of the political economy of public debt is that myopic and unconstrained politicians prefer to disregard intertemporal smoothing considerations and extract political rents as fast as possible. From this perspective, it seems that the world has much to celebrate, as most emerging market economies -- often suspect of having weak political institutions -- have chosen to save rather than waste most of their exceptional income from high commodity prices. Unfortunately, the optimistic conclusion that these countries may have turned the corner with respect to public resource management may be premature. In this paper we show that while it is true that in the long run there is a negative connection between the level of public debt and the quality of political institutions, this needs not be the case in the short run. Quite the opposite, in the short run, governments with weak political institutions are likely to save more than governments with better institutions facing the same uncertainty. This is due to an option value of rent-seeking whereby the prospect of potentially squandering funds in the future makes governments more "precautionary" today. We show that this result relies on three assumptions: Economic risk is high relative to political risk, markets are sufficiently incomplete, and there exists a rent-less policy-making regime.
|Date of creation:||Feb 2008|
|Date of revision:|
|Note:||EFG IFM POL|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
- Ricardo Caballero & Stavros Panageas, 2005. "A Quantitative Model of Sudden Stops and External Liquidity Management," NBER Working Papers 11293, National Bureau of Economic Research, Inc.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- V. V. Chari & Patrick E. Kehoe, 1990.
"Sustainable Plans and Mutual Default,"
IMF Working Papers
90/22, International Monetary Fund.
- Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008.
"Political Economy of Mechanisms,"
Econometric Society, vol. 76(3), pages 619-641, 05.
- V. V. Chari & Patrick J. Kehoe, 1989.
"Sustainable plans and debt,"
125, Federal Reserve Bank of Minneapolis.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982.
"Optimal Fiscal and Monetary Policy in an Economy Without Capital,"
532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
- Barro, Robert J., 1979.
"On the Determination of the Public Debt,"
3451400, Harvard University Department of Economics.
- Alberto Alesina & Guido Tabellini, 1990.
"A Positive Theory of Fiscal Deficits and Government Debt,"
Review of Economic Studies,
Oxford University Press, vol. 57(3), pages 403-414.
- Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
- Alessandro Lizzeri, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 909-928.
- Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996.
"Optimal taxation without state-contingent debt,"
Economics Working Papers
170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13779. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.