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Friday, 19 October 2018
11:00 AM
Tinbergen Institute Amsterdam, room 1.60TIA room 1.60Netherlands
VU Amsterdam

Motivated by the establishment of fiscal rules and independent fiscal councils, I investigate how fiscal restraint and transparency affect the voters’ ability to discipline and select political leaders. I extend the model framework of Besley and Smart (2007) by two key assumptions:  First, the fiscal budget is stochastic, and resources can be re-allocated across periods through accumulation of public debt. Second, the maximal extractable rents from holding elected office depend on the stochastic fiscal budget which creates a positive option value of re-election. The key findings of this paper are that i) enhanced information on the fiscal budget has no effect on the political equilibrium, ii) revealing the incumbent’s political motives will increase rent-seeking and thus public debt, but will enhance voter welfare if most politicians are benevolent, iii) debt rules reduce public debt accumulation, but distort the inter-temporal resource allocation, iv) the welfare effect of debt rules strongly hinges on the institutional enforceability.