Electoral Cycles, Investment, and Institutional Constraints in Developing Democracies

Brandice Canes-Wrone, Christian Ponce de Leon and Sebastian Thieme

No 22-129, IAST Working Papers from Institute for Advanced Study in Toulouse (IAST)

Abstract: A longstanding question is whether policy uncertainty reduces private fixed investment in developing democracies. Yet studying the question empirically has proven challenging given that economic activity can cause as well as result from policy uncertainty. We investigate this issue within the context of electoral business cycles, building on research that suggests elections provide an exogenous source of policy uncertainty. As a central part of this analysis, which involves four decades of data from 57 developing democracies, we examine how institutional constraints moderate the relationship. Three main findings emerge. First, on average, elections are associated with a decline in private fixed investment. Second, however, this effect varies according to the level of institutional constraints; as they increase, the electoral cycle becomes less pronounced, including in specifications that account for the potential endogeneity of the institutions. Third, the effects are larger and more robust in systems with fixed elections.

Date: 2022-01-27
New Economics Papers: this item is included in nep-his, nep-mac and nep-pol
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