Article(electronic)2004

Political Uncertainty, Public Expenditure and Growth

In: European journal of political economy, Volume 20, Issue 1, p. 153-179

Darby, Julia; Li, Chol-Won; Muscatelli, V. Anton

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Abstract

We set out an infinite-horizon political economy model with partisan & office motivation effects in an endogenous growth context to demonstrate that the existence of political uncertainty regarding re-election tends to reduce the amount of public investment by incumbent governments & underlies a switch from government investment to government consumption, thereby reducing growth. The political equilibrium is inefficient & so does not maximise social welfare. Using panel data regressions we show, for OECD countries, that there is empirical support for the hypothesis that political uncertainty tends to reduce public investment, & that there are partisan effects in public investment decisions. 3 Tables, 4 Figures, 3 Appendixes, 47 References. [Copyright 2004 Elsevier B.V.]

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