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

  • Khemani, Stuti

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2454.

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Date of creation: 30 Sep 2000
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Handle: RePEc:wbk:wbrwps:2454
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  1. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  2. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  3. Alberto Alesina & Nouriel Roubini, 1990. "Political Cycles in OECD Economies," NBER Working Papers 3478, National Bureau of Economic Research, Inc.
  4. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  5. Tirole, Jean, 1994. "The Internal Organization of Government," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 1-29, January.
  6. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
  7. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  8. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
  9. Khemani, Stuti, 2003. "Partisan politics and intergovernmental transfers in India," Policy Research Working Paper Series 3016, The World Bank.
  10. Besley, Timothy & Case, Anne, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 769-98, August.
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