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Why Is Fiscal Policy Often Procyclical?

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  • Tabellini, Guido
  • Alesina, Alberto Francesco
  • Campante, Filipe Robin

Abstract

Fiscal policy is procyclical in many developing countries. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to “starve the Leviathan†to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or lower taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: Procyclicality of fiscal policy is more pronounced in more corrupt democracies.

Suggested Citation

  • Tabellini, Guido & Alesina, Alberto Francesco & Campante, Filipe Robin, 2008. "Why Is Fiscal Policy Often Procyclical?," Scholarly Articles 34729976, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:34729976
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    More about this item

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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