Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96887
Authors: 
Cunha, Alexandre B.
Ornelas, Emanuel
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4737
Abstract: 
We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. We find that if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative tradeoff between restricting political competition and constraining the ability of governments to issue debt.
Subjects: 
political turnover
efficient policies
public debt
JEL: 
E61
E62
H30
H63
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.