Political budget cycles and election outcomes

This paper addresses two empirical questions. Is fiscal policy affected by upcoming elections? If so, do election-motivated fiscal policies enhance the probability of re-election of the incumbent? Employing data for 65 democratic countries over 1975–2005 in a semi-pooled panel model, we find that in most countries fiscal policy is hardly affected by elections. The countries for which we find a significant political budget cycle are very diverse. They include ‘young’ democracies but also ‘established’ democracies. In countries with a political budget cycle, election-motivated fiscal policies have a significant positive (but fairly small) effect on the electoral support for the political parties in government. 

Data

We use a large unbalanced cross-country time-series dataset for 65 advanced and developing countries over the period 1975 to 2005.

From the conclusions

We find that in most countries fiscal policy is hardly used for electoral purposes. Using a multilevel voting model for coalition parties in government with a large number of control variables, we find that parties in government can influence the election outcome significantly by manipulating government spending. Government spending also has an indirect positive effect on the support received by the parties in government by promoting faster economic growth in the election year. Although we find a statistically significant effect of election- induced government spending on election outcomes, its economic significance is relatively small. This could explain why fiscal policy is used for election purposes in only a few countries. 

That is from a paper by Jeroen Klomp & Jakob de Haan.

Public Choice made my day!

Effect of Elections on Investment (The US)

I use a difference-in-difference model to study the effects of political uncertainty on firm investment. I find that the investment of firms in states with a gubernatorial election in the next quarter is 4.5% lower than the investment of firms in states without an upcoming gubernatorial election. This effect is greater for closer elections, smaller firms, firms with greater asset specificity, firms with higher levels of potential investment, and politically sensitive firms. Additionally, the idiosyncratic volatility of firms in states with a gubernatorial election in the next quarter is 1.17% higher than the idiosyncratic volatility of firms in states without upcoming gubernatorial elections, demonstrating a clear link between an increase in firm uncertainty and the pull-back in investment. Post-election investment is 4.3% higher for these firms relative to the investment of firms in states that did not just elect a governor. Using day-after election excess stock returns as a firm-level measure of political sensitivity, I find that politically sensitive firms do not make up the foregone investment, suggesting a cost of political uncertainty to politically sensitive firms. Finally, I use term limits to test against alternative explanations for changes in investment around elections and as an instrumental variable to address the endogeneity in measuring close elections.

From the new working paper "Investment Around U.S. Gubernatorial Elections" by Candace Jens (November 2012).

The effects of elections on public goods and redistribution

This study investigates the effects of introducing elections on public goods and redistribution in rural China. We collect a large and unique survey to document the history of political reforms and economic policies and exploit the staggered timing of the introduction of elections for causal identification. We find that elections significantly increase public goods expenditure, the increase corresponds to demand and is paralleled by an increase in public goods provision and local taxes. We also find that elections cause significant income redistribution within villages. The results support the basic assumptions of recent theories of democratization (Acemoglu and Robinson, 2000; Lizzeri and Persico, 2004). In addition, we show that the main mechanism underlying the effect of elections is increased leader incentives.

From a new paper by Martinez-Bravo et al. The title is: "The Effects of Democratization on Public Goods and Redistribution: Evidence from China."