Elections, fiscal policy and growth : revisiting the mechanism

This short paper reconsiders the popular result that the lower the probability of getting reelected, the stronger the incumbent politicians incentive to follow short-sighted, inefficient policies. The set-up is a general equilibrium model of endogenous growth and optimal fiscal policy, in which two political parties can alternate in power. We show that re-election uncertainty is not enough to produce the popular result. Specifically, re-election uncertainty must be combined with the hypothesis that politicians care about economic outcomes more when in power than when out of power, and - more importantly - that this preference over being in power is ad hoc. That is, if politicians can also choose how much to care about economic outcomes when in and out of power, it is optimal to care the same and hence shortsighted policies do not arise. Therefore, such policies presuppose a degree of irrationality on the part of political parties.