To Be or Not To Be in Office Again: Political Business Cycles with Local Governments

Rui Nuno Baleiras () and José Silva Costa

Public Economics from EconWPA

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 incumbent’s concern with her own welfare in cases of victory and defeat. This rationale addresses local policy-making in particular. An equilibrium perfect-foresight 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. The estimation of an error- components econometric framework finds evidence in favour of the proposed explanation during the period 1986 to 1993, and enlightens the role played by several politico-economic determinants of local governments’ investment outlays, such as electoral calendar, re- candidacy decisions, political cohesion and intergovernmental capital transfers.

Keywords: local public finance; public choice; political business cycle; elections; Portugal (search for similar items in EconPapers)
JEL-codes: C23 D72 H41 H72 R51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-cdm, nep-geo, nep-mac and nep-pol
Date: 2003-02-25
Note: Type of Document - Adobe pdf; prepared on PC; to print on HP compatible; pages: 28; figures: included. The final version of this working paper was accepted for publication on January 2003 by the European Journal of Political Economy.

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwppe:0302009

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