American Economic Review: Vol. 100 No. 4 (September 2010)


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Elections, Capital Flows, and Politico-economic Equilibria

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Chang, Roberto. 2010. "Elections, Capital Flows, and Politico-economic Equilibria." American Economic Review, 100(4): 1759-77.

DOI: 10.1257/aer.100.4.1759


We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)

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Chang, Roberto (Rutgers U)

JEL Classifications

D72: Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
F34: International Lending and Debt Problems
O17: Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
O19: International Linkages to Development; Role of International Organizations

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