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Fiscal Policy, Rent Seeking and Growth under Electoral Uncertainty Theory and Evidence from the OECD

Konstantinos Angelopoulos () and George Economides

Working Papers from Business School - Economics, University of Glasgow

Abstract: We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties can alternate in power according to an exogenous reelection probability. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent-seeking activities; then distorted incentives hurt growth. This receives empirical support in a dataset of 25 OECD countries over the period 1982-1996. In particular, electoral uncertainty leads to larger government consumption shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth. Actually, estimation by IV methods and confidence intervals that are robust to (potentially) weak instruments, reveal that OLS under-estimates the effects of government spending on rent extraction activities and of such activities on economic growth.

Keywords: Fiscal policy; rent seeking; economic growth; elections. (search for similar items in EconPapers)
JEL-codes: D72 E62 O43 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Journal Article: Fiscal policy, rent seeking, and growth under electoral uncertainty: theory and evidence from the OECD (2008) Downloads
Journal Article: Fiscal policy, rent seeking, and growth under electoral uncertainty: theory and evidence from the OECD (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2007_28

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