An integrated view of electoral results and opportunistic policies

Abstract

The literature on political business cycles suggests that politicians systematically manipulate economic 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 Rogoff (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 FIML). The results clearly support the theoretical predictions: (1) Opportunism pays off, leading to a larger win-margin for the incumbent; (2) incumbents behave more opportunistically when they expect a close election race.