Research on Overlapping Political Budget Cycles

Suppose that you are an elected executive serving a multiyear term with unilateral control over the annual budget. At the end of your term you have the opportunity for reelection, what would your incentives be for allocating resources across the budget be? The classic view embedded in political economy is that you optimize the budget for electoral advantage, but what does that mean? It might mean that you time the patterns of tax and expenditures in order to coincide with the timing of your next reelection campaign. Perhaps voters have short memories or just dial up their salience of your activities during the campaign season. This might generate what the public choice literature calls “political budget cycles.”

A new paper forthcoming in Public Choice is “Overlapping Political Budget Cycles” by Dirk Foremny (University of Barcelona), Ronny Freier (Technical University of Applied Sciences Wildau), Marc-Daniel Moessinger (ZEW Mannheim), Mustafa Yeter (German Council of Economic Experts) advances this topic with an empirical investigation of political budget cycles in German municipalities between 1992 and 2006 where there exists randomly occurring electoral overlaps between the legislative and executive branches. Here is the abstract:

We advance the literature on political budget cycles by testing for cycles in expenditures for elections to the legislative and the executive branches. Using municipal data, we identify cycles independently for the two branches, evaluate the effects of overlaps, and account for general year effects. We find sizable effects on expenditures before legislative elections and even larger effects before joint elections to the legislature and the office of mayor. In the case of coincident elections, we show that it is important whether the incumbent chief executive seeks reelection. To account for the potential endogeneity of that decision, we apply an IV approach using age and pension eligibility rules.

For those interested in political budget cycles, in two of the last three years the Public Choice Society has given the Elinor & Vincent Ostrom Prize (i.e. best graduate student paper) to a study of the question. One is a metaregression analysis by Pierre Mandon and Antoine Cazals forthcoming in Journal of Economic Survey, the other is a working paper on US gubernatorial elections and government employment by Dodge Cahan. Lastly, the theory of political budget cycles have been successful in motivating instrument variables, with Steve Levitt’s 1997 AER paper on policing being a famous example.

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