Resource Windfalls and Public Debt: The Role of Political Myopia
Ohad Raveh () and
No 205, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford
We identify an adverse consequence of natural resource windfalls, which is partic-ularly detrimental in advanced democracies. We construct a political economy modelwith endogenous public debt under exogenous resource windfall shocks, in which po-litical myopia results from reelection prospects. Reelection-seeking politicians, whilemore accountable toward their electorate, are also more myopic. The latter e ectgives rise to a budget de cit bias, with the ensuing debt buildup that is exacerbatedby resource windfalls. We nd that the positive e ect of resource windfalls on debtincreases as the restrictions on reelection get laxer. We test the model's predictionsusing a panel of U.S. states over the period 1963-2007. Our identi cation strategyrests on constitutionally-entrenched di erences in gubernatorial term limits that pro-vide plausibly exogenous cross-sectional and time variation in political time horizon,and geographically-based cross-state di erences in natural endowments interacted withthe international prices of oil and gas. The empirical ndings corroborate the model'spredictions. In particular, our baseline estimates indicate that a resource windfall of$1 induces an increase of approximately g14:7 in the public debt of states with nogubernatorial term limits.
Keywords: Resource windfalls; public debt; political myopia reelection (search for similar items in EconPapers)
JEL-codes: Q32 H63 H74 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-pol
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