How elections affect fiscal strongpolicystrong and growth revisiting the.pdfVIP

European Journal of Political Economy Vol. 19 (2003) 777–792 /locate/econbase How elections affect fiscal policy and growth: revisiting the mechanism George Economidesa,*, Apostolis Philippopoulosa,b, Simon Pricec,d aAthens University of Economics and Business, P.O. Box 31763, Athens 100 35, Greece b CESifo, Munich, Germany c Bank of England, Threadneedle Street, London EC2R 8AH, UK d City University, Northampton Square, London EC1V OHB, UK Received 30 September 2001; received in revised form 13 June 2002; accepted 28 November 2002 Abstract This paper reconsiders the popular result that the lower is the probability of reelection, the greater is the incentive of incumbent politicians to choose short-sighted, inefficient policies. The set-up is a general equilibrium model of economic growth, in which fiscal policy is endogenously chosen under electoral uncertainty. Political parties can value possible economic benefits differently depending on whether they are in or out of power, and—by contrast with the literature—the relevant preference coefficient is a choice variable rather than an exogenous taste parameter. The main result is that, when political parties choose both economic policy instruments and preference coefficients, the fundamental reason for short-sighted policy is the extra rents from being in power per se. D 2003 Elsevier B.V. All rights reserved. JEL classification: D9; E6; H1; H5 Keywords: Elections; Fiscal policy; Economic growth; General equilibrium 1. Introduction Politicians are elected for a finite term and are aware that they may be replaced in future elections. This affects political behavior in several ways.1 One