Fiscal policy is procyclical in many countries, and especially in developing ones. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to "starve the Leviathan" to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or fewer taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: procyclicality of fiscal policy is more pronounced in more corrupt democracies.
Publication Type: WCFIA Working Paper
Published Date: February 2006
Field of Interest: International Economics
Alesina, Alberto, and Guido Tabellini. “Why is fiscal policy often procyclical?” Working Paper 2007-15, WeatherheadCenter for International Affairs, HarvardUniversity, 2007.