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To be or not to be in office again, that is the question: political business cycles with local governments

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  • Rui Nuno Baleiras
  • Jose da Silva Costa

Abstract

Most opportunistic -type models of political business cycles tend to posit a given objective for incumbents: maximisation of re-election chances. Though taking an opportunistic view too, we suggest a new explanation for a fiscal policy cycle: the incumbents concern with her own welfare in cases of victory and defeat. This rationale addresses local policy-making in particular. An equilibrium perfectforesight model is designed which totally dispenses with any form of irrationality (namely, on the part of voters) or the common objective functions (re-election chances). Being well grounded in basic microeconomic theory (welfare maximisation by the individual agent), our model provides another foundation for the emergence of political business cycles at the local level. The empirical plausibility of theoretical predictions is then tested on Portuguese municipal data ranging from 1977 to 1993. The estimation of an error-components econometric framework finds evidence in favour of the proposed explanation and enlightens the role played by several politicoeconomic determinants of local governments investment outlays, such as electoral calendar, re-candidacy decisions, political cohesion and intergovernmental capital transfers.

Suggested Citation

  • Rui Nuno Baleiras & Jose da Silva Costa, 2001. "To be or not to be in office again, that is the question: political business cycles with local governments," Nova SBE Working Paper Series wp402, Universidade Nova de Lisboa, Nova School of Business and Economics.
    • Handle: RePEc:unl:unlfep:wp402
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    Cited by:

    1. Linda Veiga & Francisco Veiga, 2007. "Political business cycles at the municipal level," Public Choice, Springer, vol. 131(1), pages 45-64, April.

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    More about this item

    Keywords

    Local public finance; public choice; political business cycles; elections; Portugal;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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