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Elections, Uncertainty and Irreversible Investment

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  • Canes-Wrone, Brandice
  • Park, Jee-Kwang

Abstract

This article argues that the policy uncertainty generated by elections encourages private actors to delay investments that entail high costs of reversal, creating pre-election declines in the associated sectors. Moreover, this incentive depends on the competitiveness of the race and the policy differences between the major parties/candidates. These arguments are tested using new survey and housing market data from the United States. The survey analysis assesses whether respondents’ perceptions of presidential candidates’ policy differences increased the likelihood that they would delay certain purchases and actions. The housing market analysis examines whether elections are associated with a pre-election decline in economic activity, and whether any such decline depends on electoral competitiveness. The results support the predictions and cannot be explained by existing theories.

Suggested Citation

  • Canes-Wrone, Brandice & Park, Jee-Kwang, 2014. "Elections, Uncertainty and Irreversible Investment," British Journal of Political Science, Cambridge University Press, vol. 44(1), pages 83-106, January.
  • Handle: RePEc:cup:bjposi:v:44:y:2014:i:01:p:83-106_00
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    Cited by:

    1. Redl, Chris, 2020. "Uncertainty matters: Evidence from close elections," Journal of International Economics, Elsevier, vol. 124(C).
    2. Karsten Müller, 2023. "Electoral Cycles in Macroprudential Regulation," American Economic Journal: Economic Policy, American Economic Association, vol. 15(4), pages 295-322, November.
    3. Vítor Castro & Rodrigo Martins, 2021. "What drives the duration of credit booms?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1531-1549, January.
    4. Vítor Castro & Rodrigo Martins, 2021. "Why are credit booms sometimes sweet and sometimes sour?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3054-3074, April.
    5. Vítor Castro & Rodrigo Martins, 2018. "Economic and political drivers of the duration of credit booms," NIPE Working Papers 15/2018, NIPE - Universidade do Minho.
    6. Mansour-Ichrakieh, Layal, 2020. "The impact of Israeli Geopolitical Risks on the Lebanese Financial Market: A Destabilizer Multiplier," MPRA Paper 99376, University Library of Munich, Germany.
    7. Anzuini, Alessio & Rossi, Luca & Tommasino, Pietro, 2020. "Fiscal policy uncertainty and the business cycle: Time series evidence from Italy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    8. Gazi I Kara & Youngsuk Yook, 2019. "Policy Uncertainty and Bank Mortgage Credit," BIS Working Papers 820, Bank for International Settlements.
    9. Vítor Castro & Rodrigo Martins, 2019. "Political and Institutional Determinants of Credit Booms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(5), pages 1144-1178, October.
    10. Marina Riem, 2016. "Corporate investment decisions under political uncertainty," ifo Working Paper Series 221, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    11. Alessio Anzuini & Luca Rossi, 2021. "Fiscal policy in the US: a new measure of uncertainty and its effects on the American economy," Empirical Economics, Springer, vol. 61(5), pages 2613-2634, November.
    12. Jamal Bouoiyour & Refk Selmi, 2017. "Political elections and uncertainty -Are BRICS markets equally exposed to Trump's agenda?," Papers 1701.02182, arXiv.org.
    13. Yannis Psycharis & Stavroula Iliopoulou & Maria Zoi & Panagiotis Pantazis, 2021. "Beyond the socio‐economic use of fiscal transfers: The role of political factors in Greek intergovernmental grant allocations," Regional Science Policy & Practice, Wiley Blackwell, vol. 13(3), pages 982-1008, June.
    14. Pan, Yao & You, Jing, 2020. "Successful Social Programs over Local Political Cycles," MPRA Paper 98968, University Library of Munich, Germany.
    15. Albert, Juan-Francisco & Gómez Fernández, Nerea, 2018. "The impact of uncertainty shocks in Spain: SVAR approach with sign restrictions," LSE Research Online Documents on Economics 90402, London School of Economics and Political Science, LSE Library.
    16. Alessio Anzuini & Luca Rossi, 2018. "Fiscal policy in the US: a new measure of uncertainty and its recent development," Temi di discussione (Economic working papers) 1197, Bank of Italy, Economic Research and International Relations Area.

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