The Political Economy of Public Income Volatility: With an Application to the Resource Curse

Thierry Verdier, James Robinson and Ragnar Torvik

No 10721, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a model of the political consequences of public income volatility. As is standard, political incentives create inefficient policies, but we show that making income uncertain creates specific new effects. Future volatility reduces the benefit of being in power, making policy more efficient. Yet at the same time it also reduces the re-election probability of an incumbent and since some of the policy inefficiencies are concentrated in the future, this makes inefficient policy less costly. We show how this model can help think about the connection between volatility and economic growth and in the case where volatility comes from volatile natural resource prices, a characteristic of many developing countries, we show that volatility in itself is a source of inefficient resource extraction.

Keywords: Resource extraction; Income volatility; Public policy; Politics (search for similar items in EconPapers)
JEL-codes: D72 D78 Q2 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-ltv and nep-pol
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: The political economy of public income volatility: With an application to the resource curse (2017)
Working Paper: The political economy of public income volatility: With an application to the resource curse (2017)
Working Paper: The political economy of public income volatility: With an application to the resource curse (2017)
Working Paper: The Political Economy of Public Income Volatility: With an Application to the Resource Curse (2015)
Working Paper: The Political Economy of Public Income Volatility: With an Application to the Resource Curse (2015)
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