An Empirical Investigation of Strategic Debt Under Power Sharing

Abstract

Recent theoretical and empirical research has shown that the type of government has an important impact on governments’ incentives to borrow strategically before elections. This article brings together the findings of three studies, respectively by Chang (2008), Saporiti and Streb (2008), and Hanusch (forthcoming). In a comprehensive empirical study of developed as well as developing democracies between the years 1975 and 2001 it is shown that: 1) single-party governments borrow more before elections than coalition governments; 2) pre-election deficits are higher under unified than divided government; and 3) the more powerful the largest party in a coalition is, the higher will be the deficit before elections.

Keywords: Political Budget Cycles, Coalition Government, Divided Government, Power Sharing

JEL Classification: E62, H62, H63