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Why is Fiscal Policy Often Procyclical?

Listed author(s):
  • Alberto Alesina
  • Filipe Campante
  • Guido Tabellini

Fiscal policy is procyclical in many developing countries. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to ?starve the Leviathan? to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or lower taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: Procyclicality of fiscal policy is more pronounced in more corrupt democracies.

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File URL: http://scholar.harvard.edu/campante/node/248206
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Paper provided by Harvard University OpenScholar in its series Working Paper with number 248206.

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Handle: RePEc:qsh:wpaper:248206
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