Political Budget Cycles and Fiscal Decentralization

Ben Lockwood, Jean Hindriks, Paula González and Nicolás Porteiro

No 5646, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D72 E32 E62 H41 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP5646 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Political Budget Cycles and Fiscal Decentralization (2006)
Working Paper: Political budget cycles and fiscal decentralization (2006)
Working Paper: Political Budget Cycles and Fiscal Decentralization (2006)
Working Paper: Political Budget Cycles and Fiscal Decentralization (2006)
Working Paper: Political Budget Cycles and Fiscal Decentralization (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5646

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5646

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().