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Resource Windfalls and Publics 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 particularly detrimental in advanced democracies. We construct a political economy model with endogenous public debt under exogenous resource windfall shocks, in which political myopia results from reelection prospects. Reelection-seeking politicians, while more accountable toward their electorate, are also more myopic. The latter effect gives rise to a budget defficit bias, with the ensuing debt build up that is exacerbated by resource windfalls. We find that the positive effect of resource windfalls on debt increases as the restrictions on reelection get laxer. We test the model's predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-sectional and time variation in political time horizon, and geographically-based cross-stated differences in natural endowments interacted with the international prices of oil and gas. The empirical findings corroborate the model's predictions. 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 no gubernatorial term limits.

Keywords: Infrastructure; Resource windfalls, public debt, political myopia, reelection (search for similar items in EconPapers)
JEL-codes: Q32 H74 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-pol
Date: 2018
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