DP10721 The Political Economy of Public Income Volatility: With an Application to the Resource Curse

Author(s): James A Robinson, Ragnar Torvik, Thierry Verdier
Publication Date: July 2015
Keyword(s): income volatility, politics, public policy, resource extraction
JEL(s): D72, D78, Q2
Programme Areas: Public Economics, Development Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10721

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.