Working Paper: CEPR ID: DP10721
Authors: James A. Robinson; Ragnar Torvik; Thierry Verdier
Abstract: We develop a model of the political consequences of public income volatility. As is standard, political incentives create inefficient policies, but we show that making income uncertain creates specific new effects. Future volatility reduces the benefit of being in power, making policy more efficient. Yet at the same time it also reduces the re-election probability of an incumbent and since some of the policy inefficiencies are concentrated in the future, this makes inefficient policy less costly. We show how this model can help think about the connection between volatility and economic growth and in the case where volatility comes from volatile natural resource prices, a characteristic of many developing countries, we show that volatility in itself is a source of inefficient resource extraction.
Keywords: Income volatility; Politics; Public policy; Resource extraction
JEL Codes: D72; D78; Q2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public income volatility (H29) | Reduction in expected benefits of being in power for incumbents (D72) |
| Reduction in expected benefits of being in power for incumbents (D72) | More efficient policy-making (D78) |
| Public income volatility (H29) | Decrease in reelection probability of incumbents (D72) |
| Decrease in reelection probability of incumbents (D72) | Makes inefficient policies less costly (D61) |
| Public income volatility (H29) | Higher levels of patronage employment (J68) |
| Higher levels of patronage employment (J68) | Reduces national income (H69) |
| Public income volatility (H29) | Promotes wasteful patronage and lowers public investment (H54) |