Elections, Capital Flows, and Politico-economic Equilibria
American Economic Review · 2010 · Volume 100 · Issue 4
Abstract
We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)
Keywords
Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior, International Lending and Debt Problems, Formal and Informal Sectors, Shadow Economy, Institutional Arrangements, International Linkages to Development, Role of International Organizations
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