Rent Seeking,Growth and Pre-Election Policies

We construct an otherwise standard general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for extra fiscal transfers and two political parties compete with each other for staying in power. The main prediction is that relatively large public sectors in pre-election periods distort incentives by pushing individuals away from productive work to rent seeking activity; in turn, distorted incentives hurt growth. We test this prediction by using a panel data set of a group of 25 OECD countries over the period 1982-1996, as well as a cross-section of 108 industrial and developing countries over the decade 1990-2000. Indeed, there is evidence that measures of electoral and political instability cause high government shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives, and all this is bad for growth