Elections, Fiscal Policy and Growth: Revisiting the Mechanism

16 Pages Posted: 19 May 2002

See all articles by George Economides

George Economides

Athens University of Economics and Business - Department of International and European Economic Studies

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex

Simon Price

Essex Business School; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: March 2002

Abstract

This short paper reconsiders the popular result that the lower the probability of getting reelected, the stronger the incumbent politicians' incentive to follow short-sighted, inefficient policies. The set-up is a general equilibrium model of endogenous growth and optimal fiscal policy, in which two political parties can alternate in power. We show that re-election uncertainty is not enough to produce the popular result. Specifically, re-election uncertainty must be combined with the hypothesis that politicians care about economic outcomes more when in power than when out of power, and - more importantly - that this preference over being in power is ad hoc. That is, if politicians can also choose how much to care about economic outcomes when in and out of power, it is optimal to care the same and hence shortsighted policies do not arise. Therefore, such policies presuppose a degree of irrationality on the part of political parties.

Keywords: Politics, Fiscal Policy, Economic Growth, General Equilibrium

JEL Classification: D9, E6, H1, H5

Suggested Citation

Economides, George and Philippopoulos, Apostolis and Price, Simon G., Elections, Fiscal Policy and Growth: Revisiting the Mechanism (March 2002). CESifo Working Paper Series No. 691, Available at SSRN: https://ssrn.com/abstract=306525 or http://dx.doi.org/10.2139/ssrn.306525

George Economides

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece
+30-210-8214122 (Phone)
+30-210-8203729 (Fax)

Apostolis Philippopoulos (Contact Author)

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 322 3187 (Phone)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Simon G. Price

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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