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Do re-election probabilities influence public investment?

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Abstract

An insight from dynamic political economy is that elected officials may use state variables to affect the choices of their successors. We exploit the staggered timing of local and national elections in Norway to investigate how politicians’ re-election probabilities affect their investments in physical capital. Because popularity is endogenous to politics, we use an instrumental variable approach based on regional movements in ideological sentiment. We find that higher re-election probabilities stimulate investments, particularly in programs preferred more strongly by the incumbent parties. This aligns with theory where capital and current expenditures are considered complementary inputs to government production.

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Notes

  1. Theories of strategic debt accumulation are emphasized both in general macroeconomic textbooks, such as Romer (2001), as well as in specialized textbooks on political economics, such as Persson and Tabellini (2000). The general idea that re-election concerns will affect current policy is a classic theme in the public choice literature, surveyed by Mueller (2003). Crain (2001) relates the public choice literature on policy durability to models of strategic debt accumulation.

  2. Besley and Coate (1998) and Azzimonti (2011) both consider public capital as an input in private production, which makes current investments influence future tax revenues. Peletier et al. (1999) consider the impact of deficit restrictions on investments that yield financial returns in the future. Bassetto and Sargent (2006) study the incentives for public investments in goods that benefit not only today’s voters, but also individuals who are too young to vote. Battaglini and Coate (2007) consider investment as providing a public good that benefits all citizens, and contrast it to pork-barrel projects targeted at specific groups. Svensson (1998) considers investments in property rights that stimulate future tax revenues and Hagen (2002) analyzes institutional reform to enhance public sector efficiency.

  3. An exception here is Lambertini (2003) who relies on opinion polls.

  4. Cross country studies such as Grilli et al. (1991) tend not to find any support for strategic debt accumulation, while some studies of lower levels of government do (see Crain and Tollison 1993; Pettersson-Lidbom 2001).

  5. Natvik (2009) extends the model of Tabellini and Alesina (1990) by including public capital, and shows that contrary to conventional wisdom, anticipated turnover is likely to generate too little investment rather than too large deficits.

  6. We can think of the interest rate on b as determined on the world market.

  7. An efficiency unit of public goods is \(( \alpha^{J}g_{t}^{\frac {\phi-1}{\phi}}+ ( 1-\alpha^{J} ) f_{t}^{\frac{\phi-1}{\phi }} )^{\frac{\phi}{\phi-1}}\).

  8. Details on this solution are given in a working paper version of this paper (Fiva and Natvik 2009).

  9. As shown in Natvik (2009), when ϕ<ε, it follows that \(dn_{2}^{f}/dk_{2}^{f}=-dn_{2}^{g}/dk_{2}^{f}<0\) and \(dn_{2}^{f}/dk_{2}^{g}=-dn_{2}^{g}/dk_{2}^{g}>0\), and vice versa.

  10. On the one hand, turnover implies a “substitution effect”: the incumbent party will want to shift labor expenditure from the second period to the first period, as this allows it to spend more on the program it prefers more strongly. On the other hand, turnover implies an “income effect”: politicians want to smooth the instantaneous utility flow from publicly provided goods over time. Because electoral turnover implies that in period 2 relatively little labor is allocated to the program that the incumbent derives most utility from, the way to smooth the utility flow is to cut labor expenditure in period 1 in favor of period 2. This income effect dominates the substitution effect if σ<1, while the substitution effect dominates if σ>1. If σ=1, the two effects cancel each other out.

  11. The punishment for violating this requirement is to be put under administration by the central government, but this very rarely happens. Budgets and borrowing must, however, be approved by the regional commissioner (fylkesmannen), the central government’s representative in the county. If the balanced budget requirement is broken, the regional commissioner will act to restore economic balance (Borge 2005).

  12. The dataset is available online (cf. Fiva et al. 2012).

  13. In preliminary investigations we also analyzed the impact of changes in re-election probabilities on other sectors, namely central administration, culture and infrastructure. We did not find any impact of re-election probabilities on these expenditure categories. This fits well with the theory in Sect. 2, since only spending on the programs about which the parties disagree should be influenced by re-election probabilities.

  14. We classify representatives that belong to the Socialist Left Party, the Labor Party, Red Electoral Alliance and the Communist Party as belonging to the left bloc.

  15. The total number of available observations is 2933; 1093 observations are excluded because the local council has at least one representative from local lists.

  16. Before 1992 some local governments had a practice whereby the mayor and the deputy mayor swapped positions after two years (Gravdahl 1998). However, this practice seems irrelevant for the link between re-election probabilities and investment, as our main results are unaltered when we exclude observations before 1992 where the mayor and deputy mayor represented different blocs.

  17. We exclude local governments involved in mergers, secessions, or border changes during an electoral period; local governments that do not have proportional election systems; and the capital, Oslo, which has a different institutional structure than other local governments. We also exclude local governments with less than 1000 inhabitants. Finally, we omit a limited number of observations due to missing data from the local government accounts.

  18. In the survey the separate category stated was health care, not elderly care. However, elderly care largely dominates this category in the accounts.

  19. An alternative approach for identifying party preferences is to study actual expenditure decisions with a regression discontinuity design (cf. Lee et al. 2004; Pettersson-Lidbom 2008, and Folke 2011). As our objective is not to reveal politicians’ preferences, such an analysis is beyond the scope of this paper.

  20. An alternative proxy for incumbent’s perceived re-election probabilities could, in principle, be constructed by relying on local level opinion polls. In the Norwegian context such opinion polls are, however, very rare and never held simultaneously across the country.

  21. An alternative would be to run Seemingly Unrelated Regressions (SURs). However, this would not increase efficiency in our case, since we include the same covariates across all spending programs (Davidson and MacKinnon 2004: 509).

  22. In a previous version of this study, we also report results from varying the threshold population size below which we exclude municipalities from our sample, and from applying alternative strategies to deal with the presence of local lists. Neither approach alters our main results in a substantial way. For details, see Fiva and Natvik (2009).

  23. Note that these variables may be endogenous due to Tiebout sorting and it is not obvious that they belong in our second stage.

  24. The average population of the “county capitals” is 56.000.

  25. The positive relationship we find between investment and support is therefore the opposite of what both Drazen and Eslava (2010) and Aidt et al. (2011) predict.

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Acknowledgements

This paper was awarded the 2009 CESifo Prize in Public Economics. We thank Raquel Fernández, Fernando Ferreira, Tarjei Havnes, Steinar Holden, John Leahy, Jo Thori Lind, Eva Mörk, Rick van der Ploeg, Kjetil Storesletten, the referees, and participants at several universities and conferences for insightful comments and Askill Halse for excellent research assistance. This paper is part of the research activities at the center of Equality, Social Organization, and Performance (ESOP) at the Department of Economics at the University of Oslo. ESOP is supported by the Research Council of Norway. The views expressed in this paper are those of the authors and cannot be attributed to Norges Bank.

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  1. BI Norwegian Business School, Oslo, Norway

    Jon H. Fiva

  2. Norges Bank, Oslo, Norway

    Gisle James Natvik

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  1. Jon H. Fiva
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Correspondence to Jon H. Fiva.

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Fiva, J.H., Natvik, G.J. Do re-election probabilities influence public investment?. Public Choice 157, 305–331 (2013). https://doi.org/10.1007/s11127-012-9946-8

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