Election results and opportunistic policies : an integrated approach

Abstract

The authors acknowledge helpful comments from Eric Dubois, Martin Gassebner, Luís Aguiar-Conraria and participants in a session of the 2007 Silvaplana Workshop on Political Economy.The literature on political business cycles suggests that politicians systematically manipulate economic and fiscal conditions before elections. The literature on vote and popularity functions suggests that economic conditions systematically affect election outcomes. This paper integrates these two strands of literature. We use Rogo. (1990)’s model of the rational political business cycle to derive the two-way relationship between the win-margin of the incumbent politician and the size of the opportunistic distortion of fiscal policy. This relationship is estimated, for a panel of 275 Portuguese municipalities (from 1979 to 2001), as a system of simultaneous equations (by GMM). The results clearly support the theoretical predictions: (1) opportunism pays o., leading to a larger win-margin for the incumbent; (2) incumbents behave more opportunistically when they expect a close election race.Francisco Veiga and Linda Veiga wish to thank the Portuguese Foundation for Science and Technology (FCT) for funding the project “Interactions between economics and politics in Portugal” under research grant POCI/EGE/58641/2004, of the program POCI 2010 (funded by FCT and FEDER)