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Political competition and the limits of political compromise

Cunha, Alexandre B. and Ornelas, Emanuel (2014) Political competition and the limits of political compromise. CEP Discussion Papers (CEPDP1263). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if they expect future governments to do the same. We find that, if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative trade-off between restricting political competition and constraining the ability of governments to issue debt.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2014 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HJ Public Finance
J Political Science > JA Political science (General)
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Research centres and groups > Managerial Economics and Strategy Group
Date Deposited: 26 Nov 2014 14:33
Last Modified: 30 Apr 2019 23:24
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/60273

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