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Political cycles in a developing economy - effect of elections in Indian States

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  • Khemani,Stuti

Abstract

The author studies the effect of state legislative assembly elections, on the policies of state governments in 14 major states of India, from 1960 to 1996. She identifies the effect of the timing of elections using an instrument for the electoral cycle that distinguishes between constitutionally scheduled elections, and midterm polls. She contrasts two levers of policy manipulation - fiscal policy and public service delivery - to distinguish between alternative models of political cycles. The predictions of three models are tested: 1) Populist cycles to woo uninformed and myopic voters. 2) Signaling models with asymmetric information. 3) A moral hazard model with high discounting by political agents. The empirical results for fiscal policy show that election years have a negative effect on some commodity taxes, a positive effect on investment spending, but no effect on deficits, primarily because consumption spending is reduced. With regard to public service delivery, elections have a positive and large effect on road construction by state public works departments. Strikingly, the fiscal effects are much smaller than the effect on roads. The author argues that the pattern of evidence is inconsistent with the predictions of models of voter myopia, and asymmetric information. She explores an alternative moral hazard model in which the cycle is generated by high political discounting, and career concerns persuade politicians to exert greater effort in election years on the management of public works.

Suggested Citation

  • Khemani,Stuti, 2000. "Political cycles in a developing economy - effect of elections in Indian States," Policy Research Working Paper Series 2454, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2454
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    References listed on IDEAS

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    1. Tirole, Jean, 1994. "The Internal Organization of Government," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 1-29, January.
    2. repec:cup:apsrev:v:71:y:1977:i:04:p:1467-1487_26 is not listed on IDEAS
    3. Timothy Besley & Anne Case, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 769-798.
    4. Alberto Alesina & Nouriel Roubini, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 663-688.
    5. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 1-16.
    6. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 651-678.
    7. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
    8. Oulton,Nicholas & O'Mahony,Mary, 1994. "Productivity and Growth," Cambridge Books, Cambridge University Press, number 9780521453455.
    9. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
    10. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
    11. Khemani, Stuti, 2003. "Partisan politics and intergovernmental transfers in India," Policy Research Working Paper Series 3016, The World Bank.
    12. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
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    Citations

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    Cited by:

    1. Chin, Aimee & Prakash, Nishith, 2011. "The redistributive effects of political reservation for minorities: Evidence from India," Journal of Development Economics, Elsevier, vol. 96(2), pages 265-277, November.
    2. 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.
    3. Khemani, Stuti, 2002. "Federal politics and budget deficits: evidence from the states of India," Policy Research Working Paper Series 2915, The World Bank.
    4. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers 272, OECD Publishing.
    5. Jula, Dorin, 2008. "Economic Impact of Political Cycles – The Relevance of European experinces for Romania," Working Papers of Institute for Economic Forecasting 081101, Institute for Economic Forecasting.

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