Resource Windfalls and Public Debt: The Role of Political Myopia

Ohad Raveh and Yacov Tsur

No 205, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: 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: H63 H74 Q32 (search for similar items in EconPapers)
Date: 2018-02-01
New Economics Papers: this item is included in nep-ene and nep-pol
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