Do re-election probabilities influence public investment?
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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.
KeywordsStrategic capital accumulation Incumbent popularity
JEL ClassificationE62 H40 H72
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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