The Dynamics of Public Investment Under Persistent Electoral Advantage

Abstract:     
This paper studies the effects of asymmetries in re-election probabilities across parties on public policy and its subsequent propagation to the economy. The struggle between opposing groups – that disagree on the composition of public consumption – results in governments being endogenously short-sighted: Systematic under investment in infrastructure and overspending on public goods arise, as resources are more valuable when in power. Because the party enjoying an electoral advantage is relatively less short-sighted, it devotes a larger proportion of government revenues to productive public investment. Political turnover, together with asymmetric policy choices, induces economic fluctuations in an otherwise deterministic environment. The author characterizes the long-run distribution of capital and shows that output increases on average with political advantage, despite the fact that the size of the government expands as a percentage of GDP. Volatility, on the other hand, is non-monotonic in political power and is an additional source of inefficiency.

Number of Pages in PDF File: 43

Keywords: Public Investment, Commitment, Probabilistic Voting, Markov Equilibrium, Political Cycles, Time Consistency, Electoral Advantage, Ideological Bias

JEL Classification: E61, E62, H11, H29, H41, O23

working papers series