Resource Windfalls and Public Debt: A Political Economy Perspective

45 Pages Posted: 15 Feb 2018 Last revised: 6 Jan 2020

See all articles by Ohad Raveh

Ohad Raveh

Hebrew University of Jerusalem

Yacov Tsur

Hebrew University of Jerusalem

Date Written: August 22, 2019

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 $0.2 in the public debt of states with more stringent re-election restrictions.

Suggested Citation

Raveh, Ohad and Tsur, Yacov, Resource Windfalls and Public Debt: A Political Economy Perspective (August 22, 2019). European Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3109925 or http://dx.doi.org/10.2139/ssrn.3109925

Ohad Raveh (Contact Author)

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, 91905
Israel

Yacov Tsur

Hebrew University of Jerusalem ( email )

POB 12
Rehovot, 7610001
Israel

HOME PAGE: http://https://economics.agri.huji.ac.il/yacovtsur

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