Sins of the Elder : fiscal illusion in democracies

Abstract

This work discusses the implications of democratic maturity on levels of Fiscal Illusion. Its main contribution is to identify the relevance of good governance institutions that prevent incumbents in established democracies from degenerating into electoral rent-seekers. This work develops a model that converges with a Gordon (1989) type theorem. This theorem predicts that some countries ruled by incumbents are more likely to revert to FI practices as the electorate’s maturity increases and if there are no strong restrictions on the social acceptance of political rents. Our empirical results show that democratic maturity tends to diminish fiscal illusion.