Public Choice

, Volume 157, Issue 1–2, pp 305–331 | Cite as

Do re-election probabilities influence public investment?

Article

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.

Keywords

Strategic capital accumulation Incumbent popularity 

JEL Classification

E62 H40 H72 

References

  1. Aidt, T., Veiga, F., & Veiga, L. (2011). Election results and opportunistic policies: a new test of the rational political business cycle model. Public Choice, 148, 21–44. CrossRefGoogle Scholar
  2. Ansolabehere, S., Snyder, J., & Stewart, C. (2001). Candidate positioning in U.S. house elections. American Journal of Political Science, 45(1), 136–159. CrossRefGoogle Scholar
  3. Azzimonti, M. (2011). Barriers to investment in polarized societies. American Economic Review, 101(5), 2182–2204. CrossRefGoogle Scholar
  4. Bassetto, M., & Sargent, T. (2006). Politics and efficiency of separating capital and ordinary government budgets. Quarterly Journal of Economics, 121(4), 1167–1210. Google Scholar
  5. Battaglini, M., & Coate, S. (2007). Inefficiency in legislative policy-making: a dynamic analysis. American Economic Review, 97(1), 118–149. CrossRefGoogle Scholar
  6. Beetsma, R., & van der Ploeg, F. (2007). Partisan public investment and debt: the case for fiscal restrictions. EUI Working Papers No. 37. Google Scholar
  7. Besley, T., & Case, A. (1995). Incumbent behavior: vote seeking, tax setting and yardstick competition. American Economic Review, 85(1), 25–45. Google Scholar
  8. Besley, T., & Coate, S. (1998). Sources of inefficiency in a representative democracy: a dynamic analysis. American Economic Review, 88(1), 139–156. Google Scholar
  9. Borge, L. E. (2005). Strong politicians, small deficits: evidence from Norwegian local governments. European Journal of Political Economy, 21(2), 325–344. CrossRefGoogle Scholar
  10. Borge, L. E., & Sørensen, R. J. (2002). Aggregating spending preferences: an empirical analysis of party preferences in Norwegian local governments. Public Choice, 110, 225–243. CrossRefGoogle Scholar
  11. Crain, W. M. (2001). Institutions, durability, and the value of political transactions. In W. F. Shughart & L. Razzolini (Eds.), The Elgar companion to public choice (pp. 183–196). Cheltenham: Edward Elgar. Google Scholar
  12. Crain, W. M., & Tollison, R. D. (1993). Time inconsistency and fiscal policy: empirical analysis of U.S. states, 1969–89. Journal of Public Economics, 51, 153–159. CrossRefGoogle Scholar
  13. Dahlberg, M., & Mørk, E. (2011). Is there an election cycle in public employment? Separating time effects from election year effects. CESifo Economic Studies, 57(3), 480–498. CrossRefGoogle Scholar
  14. Darby, J., Li, C. W., & Muscatelli, VA (2004). Political uncertainty, public expenditure and growth. European Journal of Political Economy, 20, 153–179. CrossRefGoogle Scholar
  15. Davidson, R., & MacKinnon, J. G. (2004). Econometric theory and methods. Oxford: Oxford University Press. Google Scholar
  16. Drazen, A., & Eslava, M. (2010). Electoral manipulation via voter-friendly spending: theory and evidence. Journal of Development Economics, 92(1), 39–52. CrossRefGoogle Scholar
  17. Fiva, J. H., & Natvik, G. J. (2009). Do re-election probabilities influence public investment? CESifo Working Paper No. 2709. Google Scholar
  18. Fiva, J. H., Halse, A., & Natvik, G. J. (2012). Local government dataset. Available at: www.jon.fiva.no/data.htm.
  19. Folke, O. (2011). Shades of brown and green: party effects in proportional election systems. Unpublished manuscript, Columbia University. Google Scholar
  20. Glazer, A. (1989). Politics and the choice of durability. American Economic Review, 79(5), 1207–1213. Google Scholar
  21. Gravdahl, H. P. (1998). Consensual coalitions? Coalition formation in Norwegian municipalities. Scandinavian Political Studies, 21(4), 307–323. CrossRefGoogle Scholar
  22. Grilli, V., Masciandaro, D., & Tabellini, G. (1991). Political and monetary institutions and public financial policies in the industrial democracies. Economic Policy, 13, 341–392. CrossRefGoogle Scholar
  23. Hagen, R. J. (2002). The electoral politics of public sector institutional reform. European Journal of Political Economy, 18(3), 449–473. CrossRefGoogle Scholar
  24. Klump, R., McAdam, P., & Willman, A. (2007). Factor substitution and factor-augmenting technical progress in the United States: a normalized supply-side system approach. Review of Economics and Statistics, 89(1), 183–192. CrossRefGoogle Scholar
  25. Lambertini, L. (2003). Are budget deficits used strategically? Boston College Working Papers in Economics No. 578. Google Scholar
  26. Lee, D. S., Moretti, E., & Butler, M. (2004). Do voters affect or elect policies? Evidence from the U.S. house. Quarterly Journal of Economics, 119(3), 807–859. CrossRefGoogle Scholar
  27. Levitt, S. D., & Snyder, J. (1997). The impact of federal spending on house election outcomes. Journal of Political Economy, 105(1), 30–53. CrossRefGoogle Scholar
  28. Mueller, D. C. (2003). Public choice III. Cambridge: Cambridge University Press. CrossRefGoogle Scholar
  29. Natvik, G. J. (2009). The political economy of fiscal deficits and government production. Norges Bank Working Paper No. 7. Google Scholar
  30. Peletier, B., Dur, R., & Swank, O. (1999). Voting on the budget deficit: comment. American Economic Review, 89(5), 1377–1381. CrossRefGoogle Scholar
  31. Persson, T., & Svensson, L. (1989). Why a stubborn conservative would run a deficit: policy with time-inconsistent preferences. Quarterly Journal of Economics, 104(2), 325–345. CrossRefGoogle Scholar
  32. Persson, T., & Tabellini, G. (2000). Political economics. Cambridge: MIT Press. Google Scholar
  33. Pettersson-Lidbom, P. (2001). An empirical investigation of the strategic use of debt. Journal of Political Economy, 109(3), 570–583. CrossRefGoogle Scholar
  34. Pettersson-Lidbom, P. (2008). Do parties matter for economic outcomes: a regression-discontinuity approach. Journal of the European Economic Association, 6, 5. CrossRefGoogle Scholar
  35. Rattsø, J. (2003). Vertical imbalance and fiscal behavior in a welfare state: Norway. In J. Rodden, G. Eskeland, & J. Litvack (Eds.), Fiscal decentralization and the challenge of hard budget constraints (pp. 133–160). Cambridge: MIT Press. Google Scholar
  36. Robinson, J. A., & Torvik, R. (2005). White elephants. Journal of Public Economics, 89(2), 197–210. CrossRefGoogle Scholar
  37. Rogoff, K. (1990). Equilibrium political budget cycles. The American Economic Review, 80(1), 21–36. Google Scholar
  38. Rogoff, K., & Sibert, A. (1988). Elections and macroeconomic policy cycles. The Review of Economic Studies, 55(1), 1–16. CrossRefGoogle Scholar
  39. Romer, D. (2001). Advanced macroeconomics. New York: McGraw-Hill. Google Scholar
  40. Salmon, P. (1987). Decentralization as an incentive scheme. Oxford Review of Economic Policy, 3(2), 24–43. CrossRefGoogle Scholar
  41. Sørensen, R. J. (1995). The demand for local government goods: the impact of parties, committees, and public sector politicians. European Journal of Political Research, 27, 119–141. CrossRefGoogle Scholar
  42. Strøm, K., & Leipart, J. Y. (1993). Policy, institutions, and coalition avoidance: Norwegian governments, 1945–1990. The American Political Science Review, 87(4), 870–887. CrossRefGoogle Scholar
  43. Svaleryd, H. (2009). Women’s representation and public spending. European Journal of Political Economy, 25(2), 186–198. CrossRefGoogle Scholar
  44. Svaleryd, H., & Vlachos, J. (2009). Political rents in a non-corrupt democracy. Journal of Public Economics, 93(3-4), 355–372. CrossRefGoogle Scholar
  45. Svensson, J. (1998). Investment, property rights and political instability: theory and evidence. European Economic Review, 42(7), 1317–1341. CrossRefGoogle Scholar
  46. Tabellini, G., & Alesina, A. (1990). Voting on the budget deficit. American Economic Review, 80(1), 37–49. Google Scholar
  47. Veiga, F. J., & Veiga, L. G. (2007). Political business cycle at the municipal level. Public Choice, 131(1), 45–64. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.BI Norwegian Business SchoolOsloNorway
  2. 2.Norges BankOsloNorway

Personalised recommendations