The Elasticity of Intertemporal Substitution: A Tool to Constrain Profligate Government Spending

Suzanna-Maria Paleologou

doi:10.4236/tel.2020.103039

Abstract

We construct a theoretical model to explain profligate electoral fiscal behaviour and to provide a tool, namely the estimated elasticity of intertemporal substitution, for the fiscal authorities to detect and timely constrain such behaviour to promote fiscal prudence. The key is to obtain data on the incumbent party preferred sequence of public consumption levels over time. The model frames this case using a CES utility function and provides one possible mechanism to explain why there are so many examples in the empirical literature that find insignificant electoral biases in fiscal variables.

Highlights

In democratic institutions, it is common to observe fiscal profligacy, especially in pre-election periods
The first strand of these studiesis related to the “rational partisan cycle models” and isbest represented by Alesina (1987), Aghion and Bolton (1990) and Mile
We develop an election cycle model, which introduces within an MFS style rational partisan cycle model, aspects of a PS style strategic debt model

Summary

Introduction

It is common to observe fiscal profligacy, especially in pre-election periods. The second strand of the literature is related to “the strategic debt cycles models”, developed by Persson and Svensson (1989), Alesina and Tabellini (1990), Cukierman et al (1992) and Azzimonti (2011) They argue that the incumbent party strategically manipulates state variables because of time-inconsistent preferences. The third strand of the literature is related to the “rational political budget cycle models” represented by Rogoff and Sibert (1988), Rogoff (1990), Alesina and Cukierman (1990), Shi and Svensson (2006) and Drazen and Enslava (2010) This strand of the literature examines the case when a government in election periods acts strategically in order to signal its preferences and/or its ability to the voters. The paper is structured as follows: in section 2, we present our model and we state our main results in terms of a proposition; section 3 discusses some policy implications and section 4 concludes the paper

A Simple Model

Policy Implications

Conclusion