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Pension reserve fund, political budget cycles and fiscal illusion

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  • Wang, Xue
  • Bohn, Frank

Abstract

We model political manipulations of pension reserve funds in a modified Shi and Svensson (2006) political budget cycle (PBC) model. Assuming that a share of voters suffers from fiscal illusion the incumbent can increase her re-election chances by prematurely spending parts of the reserve fund. We also obtain results that are counterintuitive, but only at first sight. First, it can be shown that the incumbent wants to reduce the manipulation when her ego rent increases. Second, the optimal magnitude of manipulation does not necessarily go up when the share of voters suffering from fiscal illusion rises.

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  • Wang, Xue & Bohn, Frank, 2019. "Pension reserve fund, political budget cycles and fiscal illusion," European Journal of Political Economy, Elsevier, vol. 56(C), pages 62-73.
    • Handle: RePEc:eee:poleco:v:56:y:2019:i:c:p:62-73
    DOI: 10.1016/j.ejpoleco.2018.07.002
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    3. Emilio Gómez-Déniz & Jorge V. Pérez-Rodríguez & Simón Sosvilla-Rivero, 2022. "Analyzing How the Social Security Reserve Fund in Spain Affects the Sustainability of the Pension System," Risks, MDPI, vol. 10(6), pages 1-17, June.
    4. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).

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