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Resource Windfalls and Publics Debt: The Role of Political Myopia

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  • Ohad Raveh
  • Yacov Tsur

Abstract

We identify an adverse consequence of natural resource windfalls, which is particularly detrimental in advanced democracies. We construct a political economy model with endogenous public debt under exogenous resource windfall shocks, in which political myopia results from reelection prospects. Reelection-seeking politicians, while more accountable toward their electorate, are also more myopic. The latter effect gives rise to a budget defficit bias, with the ensuing debt build up that is exacerbated by resource windfalls. We find that the positive effect of resource windfalls on debt increases as the restrictions on reelection get laxer. We test the model's predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-sectional and time variation in political time horizon, and geographically-based cross-stated differences in natural endowments interacted with the international prices of oil and gas. The empirical findings corroborate the model's predictions. In particular, our baseline estimates indicate that a resource windfall of $1 induces an increase of approximately g14:7 in the public debt of states with no gubernatorial term limits.

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  • Ohad Raveh & Yacov Tsur, 2018. "Resource Windfalls and Publics Debt: The Role of Political Myopia," OxCarre Working Papers 205, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:205
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    Keywords

    Infrastructure; Resource windfalls; public debt; political myopia; reelection;

    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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