Working Paper: NBER ID: w11600
Authors: Alberto Alesina; Guido Tabellini
Abstract: Many countries, especially developing ones, follow procyclical fiscal polices, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent\ngovernments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.
Keywords: Fiscal Policy; Procyclicality; Corruption; Political Economy
JEL Codes: H30; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| voters' lack of trust in corrupt governments (D72) | demands for higher utility in good times (D11) |
| demands for higher utility in good times (D11) | increased public spending (H59) |
| demands for higher utility in good times (D11) | lower taxes during economic booms (H29) |
| increased public spending (H59) | procyclical fiscal policy (E62) |
| lower taxes during economic booms (H29) | procyclical fiscal policy (E62) |
| higher degree of corruption (D73) | more procyclical fiscal policies (E62) |
| voters (D72) | hold governments accountable in democracies (D72) |
| corruption (D73) | fiscal policy behavior in democracies (E62) |
| government failure (H12) | observed procyclicality (E32) |