Policy myopia and economic growth

Abstract

We develop a theory of second best policy myopia. Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments. We demonstrate that policy myopia is not an inevitable implication of the fact that voters cannot observe immediately how much their politicians invest in certain types of public goods; rather it is the interaction between observation lags, economic growth and binding revenue constraints that forces rational voters to accept a short-term bias. We argue that growth in government and policy myopia are related social phenomena. The analysis is motivated by stylized facts about public spending patterns.Keywords: Myopia; growth; public goods; electoral accountability. JEL Classi…cation: D72; D82.We would like to thank the ESRC for research support under the "Understanding the Evolving Macroeconomy" research program (grant no. L138251006). We have bene…ted from comments from Stephen Morris, Nicola Persico, Roger Backhouse, Vania Sena, Laura Marsiliani, John Hardman Moore, Timothy Guinnane, Jozsef Sakovics, and numerous seminar participants. We also thank Karlygash Kuralbayeva for research assistance and Elena Loukoianova for assistance with related research. Policy Myopia and Economic Growth AbstractWe develop a theory of second best policy myopia. Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments. We demonstrate that policy myopia is not an inevitable implication of the fact that voters cannot observe immediately how much their politicians invest in certain types of public goods; rather it is the interaction between observation lags, economic growth and binding revenue constraints that forces rational voters to accept a short-term bias. We argue that growth in government and policy myopia are related social phenomena. The analysis is motivated by stylized facts about public spending patterns.

Corruption and Sustainable Development

“…Conceptually, these may infl uence growth in their own right, that is, irrespective of the level of corruption. One possibility is that the variations in political accountability systematically aff ect the time horizon of politicians and thus their incentive to invest in the economy's capital assets (Aidt and Dutta, 2007). Another is that some legal environments make it hard to enforce intertemporal contracts.…”

Policy persistence and rent extraction

“…15 For a positive theory of public expenditure, a benevolent politician is, as Aidt and Dutta (2007) put it , "a myth". But if some politicians are marginally "better" than others (in the sense that they are more idealistic or more altruistic than others) then the notation of good and bad politicians suffices to model such differences.…”

“…He argues that special interest groups increase solidarity and cooperation, attributes necessary for the resolution of collective action problems. 2 Olson, on the other hand, expresses the opposite opinion, and argues that special interest groups may limit growth possibilities. He observes that they have an incentive to lobby for socially inefficient policies which benefit themselves but are costly to society.…”

“…They suggest that voters will not support policies that provide temporary efficiency improvements if they cannot control how long a costly policy persists once it is introduced. Aidt and Dutta (2007) find that growth in government eventually leads to a bias in public expenditure towards short term projects and argue that this can be explained by a desire on the part of the electorate to check frequently on the performance of politicians.…”

Bad Apples: Political Paralysis and the Quality of Politicians

“…Rent-extraction policies allow the incumbent to appropriate funds, but produce no return. 2 Both policies look identical in the period they are implemented; their type becomes obvious once their re-turn materializes (or not). This is an accurate description of many policies; for example, public investment projects.…”