Resource Windfalls and Public Debt: The Role of Political Myopia

Feb 2018 | 205

Authors: Ohad Raveh, Yacov Tsur

We identify an adverse consequence of natural resource windfalls, which is partic-
ularly detrimental in advanced democracies. We construct a political economy model
with endogenous public debt under exogenous resource windfall shocks, in which po-
litical myopia results from reelection prospects. Reelection-seeking politicians, while
more accountable toward their electorate, are also more myopic. The latter e ect
gives rise to a budget de cit bias, with the ensuing debt buildup that is exacerbated
by resource windfalls. We nd that the positive e ect of resource windfalls on debt
increases as the restrictions on reelection get laxer. We test the model's predictions
using a panel of U.S. states over the period 1963-2007. Our identi cation strategy
rests on constitutionally-entrenched di erences in gubernatorial term limits that pro-
vide plausibly exogenous cross-sectional and time variation in political time horizon,
and geographically-based cross-state di erences in natural endowments interacted with
the international prices of oil and gas. The empirical ndings corroborate the model's
predictions. In particular, our baseline estimates indicate that a resource windfall of
$1 induces an increase of approximately g14:7 in the public debt of states with no
gubernatorial term limits.

JEL Codes: Q32, H63, H74

Keywords: Resource windfalls, public debt, political myopia reelection

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