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Political forecast cycles

Frank Bohn () and Francisco Veiga ()

European Journal of Political Economy, 2021, vol. 66, issue C

Abstract: A moral hazard model is used to show why overly optimistic revenue forecasts prior to elections can be optimal: Opportunistic governments can increase spending and appear more competent; ex post deficits emerge in election years, thereby producing political forecast cycles – as also found for US states in the empirical literature. Additionally, we obtain three theoretical results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up.

Keywords: Opportunistic political budget cycles; Deficit; Revenue forecasts; Forecast errors; Asymmetric information; Political economy (search for similar items in EconPapers)
JEL-codes: D72 E32 H68 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.ejpoleco.2020.101934

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European Journal of Political Economy is currently edited by J. De Haan, A. L. Hillman and H. W. Ursprung

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