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

Robinson, James A.; Torvik, Ragnar; Verdier, Thierry
Working paper
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URI
http://hdl.handle.net/11250/2364621
Date
2015
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  • Centre for Applied Macro- and Petroleum economics (CAMP) [124]
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.
Series
CAMP Working Papers Series;3/2015

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