Political Budget Cycles and Fiscal Decentralization

38 Pages Posted: 19 Jul 2006

See all articles by Ben Lockwood

Ben Lockwood

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Paula Gonzalez

Universidad Pablo de Olavide

Jean Hindriks

University of London - School of Economics and Finance

Nicolas Porteiro

University Pablo de Olavide

Date Written: April 2006

Abstract

In this paper, we study a model a la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.

Keywords: Political budget cycle, fiscal decentralization, local public goods

JEL Classification: D72, E32, E62, H41

Suggested Citation

Lockwood, Ben and Gonzalez, Paula and Hindriks, Jean and Porteiro, Nicolas, Political Budget Cycles and Fiscal Decentralization (April 2006). CEPR Discussion Paper No. 5646. Available at SSRN: https://ssrn.com/abstract=918294

Ben Lockwood (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8906 (Phone)
+44 24 7657 2548 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Paula Gonzalez

Universidad Pablo de Olavide ( email )

Ctra. Utrera, Km.1
Sevilla, Seville 41010
Spain
+34 954 34 83 80 (Phone)
+34 954 34 93 39 (Fax)

Jean Hindriks

University of London - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7882 7807 (Phone)
+44 20 8983 3580 (Fax)

HOME PAGE: http://www.dc.eclipse.co.uk/hindriks.html

Nicolas Porteiro

University Pablo de Olavide ( email )

Ctra. Utrera, Km.1
Sevilla, Seville 41010
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
16
Abstract Views
2,472
PlumX Metrics