ELECTIONS, FISCAL POLICY AND GROWTH: Revisiting the mechanism

Abstract: This paper reconsiders the popular result that the lower the probability of getting re-elected, the stronger the incumbent politicians ’ incentive to follow short-sighted, inefficient policies. The set-up is a general equilibrium model of economic growth, in which fiscal policy is endogenously chosen under electoral uncertainty. Political parties can value possible economic benefits differently depending on whether they are in or out of power, and- by contrast with the literature- the relevant preference coefficient is a choice variable rather than an exogenous taste parameter. The main result is that, when political parties choose both economic policy instruments and preference coefficients, the deep reason for short-sighted policy is the extra rents from being in power per se