A central issue in dynamic political economy is to understand how political frictions affect fiscal policy and economic performance over time. The recent literature has focused almost exclusively on characterizing symmetric equilibria in which parties behave identically. A main result is that re-election uncertainty introduces a wedge in intertemporal decisions when governments lack commitment. This wedge distorts economic allocations; thereby reducing long-run output and consumption.
This paper contributes to the literature by considering the implications of asymmetries in election probabilities between competing parties. Additional distortions emerge when incumbents face different re-election prospects, since the politically disadvantaged party leans toward more short-sighted policies. Alternating power induces economic fluctuations via changes in taxation and spending (in an environment that is otherwise deterministic), furthering the inefficiencies. I find that the resulting volatilities are non-monotonic in the size of the political bias.
Persistent partisan advantage in democratic elections has been extensively documented by political scientists, in particular regarding the voting behavior across US states. Using a multi-component index that combines historical results in gubernatorial, House, and Senate elections, individual states are characterized being under Democratic or Republican control. Brown and Bruce (2008) use a combination of the two most common indices of political competition, the Ranney index and the Holbrook Van Dunk index, to compute trends in political advantage. Their study shows that between 1968 and 2003, Massachusetts, Maryland, and New York exhibit a sizeable and uninterrupted Democratic advantage (both at the state and national levels).
New Hampshire, Wyoming, and Indiana, on the other hand, have been exclusively under Republican control. Using the index in Diermeier, Keane, and Merlo (2005) I document that the Democratic party has shown an average advantage during the period 1929 - 2006 at the national level. Evidence of systematic electoral biases in other countries is further illustrated by the recent experiences of Japan and Mexico. Despite the body of research showing that party advantage is fairly common and empirically relevant, the possibility of asymmetries in election prospects have been ignored in dynamic political economy models. Understanding its implications is a main objective of this work.
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The dynamics of public investment under persistent electoral advantage
