Moral Hazard in an Economic Union: Politics, Economics, and Fiscal Gimmickry in Europe

49 Pages Posted: 11 Jul 2012 Last revised: 1 Apr 2013

See all articles by James E. Alt

James E. Alt

Harvard University - Department of Government

David Dreyer Lassen

University of Copenhagen - Department of Economics

Joachim Wehner

London School of Economics & Political Science (LSE)

Date Written: July 9, 2012

Abstract

This paper examines empirically how transparency of the budget process affects fiscal rules and incentives for fiscal gimmickry or creative accounting in the European Union. Using stock-flow adjustment data for EU countries from 1990-2007, we show that pressure from a deficit limit rule as in the Stability and Growth Pact creates incentives for fiscal gimmicks, as does political pressure from the electoral cycle and economic pressure from negative shocks in the business cycle. However, we show that where institutional transparency is higher, these incentives are damped and largely disappear. We infer that fiscal rules do not work well when institutional transparency is low.

Keywords: Political Economy, Transparency, Fiscal Policy, Deficits, Debt Management, Electoral Cycles

JEL Classification: D72, E62, H62, H63

Suggested Citation

Alt, James E. and Lassen, David Dreyer and Wehner, Joachim, Moral Hazard in an Economic Union: Politics, Economics, and Fiscal Gimmickry in Europe (July 9, 2012). Available at SSRN: https://ssrn.com/abstract=2102334 or http://dx.doi.org/10.2139/ssrn.2102334

James E. Alt (Contact Author)

Harvard University - Department of Government ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States

David Dreyer Lassen

University of Copenhagen - Department of Economics ( email )

Studiestraede 6
DK 1455 Copenhagen
Denmark
+45 3532 4412 (Phone)
+45 3532 4444 (Fax)

Joachim Wehner

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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