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An Empirical Investigation of the Strategic Use of Debt

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  • Per Pettersson-Lidbom

Abstract

The paper examines the accumulation of debt by Swedish local governments. I find that right-wing governments accumulate more debt when facing a higher probability of defeat, whereas the opposite occurs for left-wing governments. These effects are sizable: a right-wing government increases its level of debt by 15 percent, whereas a left-wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office. The results are consistent with the predictions from a strategic debt model developed by Persson and Svensson.

Suggested Citation

  • Per Pettersson-Lidbom, 2001. "An Empirical Investigation of the Strategic Use of Debt," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 570-583, June.
    • Handle: RePEc:ucp:jpolec:v:109:y:2001:i:3:p:570-583
    DOI: 10.1086/321021
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    References listed on IDEAS

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    1. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 325-345.
    2. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    3. Beck, Nathaniel & Katz, Jonathan N., 1995. "What To Do (and Not to Do) with Time-Series Cross-Section Data," American Political Science Review, Cambridge University Press, vol. 89(3), pages 634-647, September.
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