Ignorance Isn't Bliss: Uninformed Voters Drive Budget Cycles

34 Pages Posted: 10 Jan 2018

See all articles by Jan Janků

Jan Janků

Technical University of Ostrava

Jan Libich

La Trobe University - Business School

Date Written: January 9, 2018

Abstract

The paper shows that blissful ignorance does not apply to fiscal policy. In countries with insufficiently informed voters, politicians attempt to ‘buy’ votes by substantially increasing government expenditures in election years and tightening the belt post election. This generates costly budget cycles and unnecessary macroeconomic fluctuations. Unlike much of the earlier literature that found this effect only in low income countries or new democracies, we demonstrate that it has occurred in many prosperous countries with an established political system. In particular, constructing an Informed-voter (INFOVOT) index, we show that only the top third of OECD countries with well-informed voters does not experience political budget cycles. In contrast, the bottom third of OECD countries with poorly-informed voters see a deterioration of the budget balance by 1% of GDP on average in election years, which represents an increase of more than 25% relative to their usual budget deficits. Interestingly, for the intermediate group of countries with moderately-informed voters, for example Austria, France, Germany, Japan, Luxembourg, the U.K. and the U.S., election deficit hikes (of 0.75% of GDP) are observed during the 1995-2008 period only, but not since. We discuss why their budget cycles may have disappeared after the Global financial crisis, unlike in countries with poorly-informed voters, drawing on the ‘rational inattention’ literature. We also offer some policy recommendations that could improve the voters’ incentives to acquire and process fiscal policy information, and thus avoid an ‘ignorance trap’.

Keywords: Political Budget Cycle, Uninformed Voters, Elections, Rational Inattention, Generalized Method of Moments

JEL Classification: D72, E62, H62

Suggested Citation

Janků, Jan and Libich, Jan, Ignorance Isn't Bliss: Uninformed Voters Drive Budget Cycles (January 9, 2018). CAMA Working Paper No. 2/2018, Available at SSRN: https://ssrn.com/abstract=3099189 or http://dx.doi.org/10.2139/ssrn.3099189

Jan Janků

Technical University of Ostrava ( email )

17. listopadu 2172/15
Ostrava, 708 00
Czech Republic

Jan Libich (Contact Author)

La Trobe University - Business School ( email )

La Trobe University
Bundoora, Victoria, Victoria 3083
Australia

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