Citation

Discussion Paper Details

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

Author(s): James A Robinson, Ragnar Torvik and Thierry Verdier

Publication Date: July 2015

Keyword(s): income volatility, politics, public policy and resource extraction

Programme Area(s): Development Economics, Macroeconomics and Growth and Public Economics

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.

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Bibliographic Reference

Robinson, J, Torvik, R and Verdier, T. 2015. 'The Political Economy of Public Income Volatility: With an Application to the Resource Curse'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10721