Rationality and the political business cycle: The case of local government

Conclusions

The empirical results which have been reported support the hypotheses' implied by the model of rational political behavior set out in Section 2. In pre-election periods, local government development expenditures deviate significantly from their normal levels. The extent of deviation is approximately 20%.

Consistent with the predictions of this model, it is found that incumbents not seeking re-election deviated far more in their pre-election discretionary budget expenditure than incumbents seeking re-election. The expenditure gap between the two types of incumbents is large and statistically significant. Incumbents not seeking re-election exhibit a deviation equivalent to 47% of the development budget, while those seeking re-election exhibit a 12% deviation.

The theory and the empirical results contradict, at least for the case of local governments, the conventional arguments that intertemporal asymmetries in government expenditures are the consequences of attempts by incumbents to increase political support, and that such attempts can succeed because the public is myopic or irrational. On the contrary, the empirical results in this paper support a theory of rational behavior where asymmetric intertemporal expenditures in pre- and post-election periods derive from an incumbent's perception of the likelihood of failure in a re-election quest, or an incumbent's decision to leave political office.