Fiscal Policy, Government Polarization, and the Economic Literacy of Voters

Abstract

We model a two-parties electoral game in an environment where voters are imperfectly informed on the administrative ability of each party. In equilibrium, parties try to manipulate voters' beliefs and implement fiscal policies that are looser than the social optimum. The size of this deviation from optimality increases with the incentive of parties to manipulate, the voters' information disadvantage, and the interaction between these two elements. We test our theoretical predictions on a sample of 23 OECD countries over the period 1999-2008. We measure the incentive to manipulate voters' beliefs through the ideological cohesion of the cabinet (i.e. government polarization), and the scope to manipulate such beliefs through the level of voters' economic literacy. We find that polarized governments tend to worsen fiscal balances, and this is more likely in countries where the voters' economic literacy is low. However, such tendency vanishes as literacy increases, suggesting that polarization leads to biased fiscal policies only when there is enough room for manipulation. Our results remain stable after controlling for potentially confounding differences across countries and over time -such as individuals' education attainments, electoral and institutional systems, voter turnout -, several types of falsification tests, time dynamics and unobserved heterogeneity.

Financial literacy, education, and voter turnout

“…This was the case in a work on the electoral cost of major pension reforms (Fornero and Lo Prete, 2019), where the probability of a government to be re-elected in the aftermath of a reform was higher in countries where the level of financial literacy is higher. If financial literacy accounts for the set of skills that enable people to take more informed political choices (see also Murtinu et al, 2017), it may arguably represent a relevant determinant of political participation, too.…”