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Resource windfalls and public debt: A political economy perspective   | Environmental Economics and Management

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The Department of Environmental Economics and Management

The Robert H. Smith Faculty
of Agriculture, Food and Environment
The Hebrew University of Jerusalem

Herzl 229, Rehovot 7610001
Fax: 08-9466267

Department Head:
Dr. Ohad Raveh, Tel: 08-9489373

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Dr. Ohad Raveh, Tel: 08-9489373

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Miri Arazi, Tel: 08-9489230

Resource windfalls and public debt: A political economy perspective  

Citation:

Raveh, O. ; Tsur, Y. . Resource Windfalls And Public Debt: A Political Economy Perspective&Nbsp;&Nbsp;. European Economic Review 2020, 123, 103371.

Abstract:

Can natural resource windfalls increase public debt in democracies? Adopting a political economy perspective, we show that the answer is in the affirmative. Resource windfalls increase both the government’s income and wealth. The former mitigates the need to borrow, whereas the latter encourages further borrowing (as it improves its terms), implying an ambiguous pure effect of resource windfalls on debt. Re-election considerations shorten political time horizons and give rise to political myopia. We show that higher political myopia, induced by more stringent (institutional) re-election restrictions, magnifies the wealth effect, turning positive the effect of resource windfalls on debt. We test the model’s predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re-election prospects, and geographically-based cross-state differences in natural endowments. Our baseline estimates indicate that a resource windfall of $1 induces an increase of approximately ¢20 in the public debt of states with more stringent re-election restrictions.

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Last updated on 01/27/2021