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Public Choice

, Volume 156, Issue 3–4, pp 703–722 | Cite as

Making rules credible: divided government and political budget cycles

  • Jorge M. StrebEmail author
  • Gustavo Torrens
Article

Abstract

Political budget cycles (PBCs) can result from the credibility problems office-motivated incumbents face under asymmetric information, due to the temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit public debt, because borrowing is a necessary condition for aggregate PBCs. Since the legislature must typically authorize new debt, divided government can make these fiscal rules credible. Commitment is undermined by either unified government or imperfect compliance with the budget law, which can help explain why PBCs are stronger in developing countries and in new democracies. When divided government affects efficiency, voters must trade off electoral distortions and government competence.

Keywords

Political budget cycles Unified government Rules Credibility Divided government 

JEL Classification

D72 D78 H60 

Notes

Acknowledgements

We greatly benefited from insightful suggestions made by the editor, William Shughart, and two reviewers, as well as from conversations with Alejandro Corbacho, Sybil Rhodes, Alejandro Saporiti and Javier Zelaznik. We appreciate comments by Jorge Baldrich, Maurício Bugarin, Daniel Heymann, Cecilia Rumi and participants at the meetings of the Banco Central del Uruguay, of the Asociación Argentina de Economía Política, of the Sociedad Argentina de Análisis Político and of the Econometric Society at Rio de Janeiro. We acknowledge support from the Agencia Nacional de Promoción Científica y Tecnológica of Argentina (PICT 34790 Préstamo BID 1728/OC-AR).

Supplementary material

11127_2012_9923_MOESM1_ESM.tex (28 kb)
Appendix to “Making Rules Credible: Divided Government and Political Budget Cycles” (TEX 25 kB)

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Universidad del CemaBuenos AiresArgentina
  2. 2.Department of EconomicsWashington University in St. LouisSt. LouisUSA

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