Uninformed voters with (im)precise expectations: Explaining political budget cycle puzzles

Abstract

Governments try to improve re-election chances by using fiscal instruments; they can shift voters' expectations of government competence because some voters are impaired by uninformedness. We argue that uninformed voters may also be impaired in another way which has not been considered in the literature, namely that uninformed voters are uncertain about the precision of that expected competence. Analytically, we show that political budget cycles (PBCs) are only produced when we have many uninformed voters and their expected competence of the government is fairly uncertain; or with few uninformed voters and certain expectations. This could explain two empirical puzzles on why we sometimes find and sometimes not (i) PBCs in developed and democratic countries with strong institutions, and (ii) that press freedom exacerbates PBCs. In a panel of 70 countries (1986–2015) we find empirical support for these findings. Results are robust to alternative specifications and explanations like fiscal rules, corruption and expected downturns.