Fiscal Policy, Government Polarization, and the Economic Literacy of Voters
62 Pages Posted: 3 Nov 2016 Last revised: 5 Apr 2017
Date Written: April 4, 2017
We model a two-parties electoral game in an environment where voters are imperfectly informed on the administrative ability of each party. In equilibrium, parties try to manipulate voters’ beliefs and implement fiscal policies that are looser than the social optimum. The size of this deviation from optimality increases with the incentive of parties to manipulate, the voters’ information disadvantage, and the interaction between these two elements. We test our theoretical predictions on a sample of 23 OECD countries over the period 1999–2008. We measure the incentive to manipulate voters’ beliefs through the ideological cohesion of the cabinet (i.e. government polarization), and the scope to manipulate such beliefs through the level of voters’ economic literacy. We find that polarized governments tend to worsen fiscal balances, and this is more likely in countries where the voters’ economic literacy is low. However, such tendency vanishes as literacy increases, suggesting that polarization leads to biased fiscal policies only when there is enough room for manipulation. Our results remain stable after controlling for potentially confounding differences across countries and over time – such as electoral, institutional and voting systems, cabinet fractionalization, individuals’ education attainments, information diffusion, voter turnout and political budget cycles – several types of falsification tests, time dynamics and unobserved heterogeneity.
Keywords: budget balance, government polarization, electoral game, economic literacy
JEL Classification: D72, E62, H62
Suggested Citation: Suggested Citation