March 8: Nicola Nones (UVA)

Monday, March 8 2021

Nicola Nones (UVA), “Politicians with Business Experience and Fiscal Consolidation”

Abstract:

In this paper I will develop theoretically-driven expectations about how business experience may affect attitudes towards fiscal consolidation – defined as economic policies aimed at balancing the overall public budget. Leveraging newly published datasets on (weakly) exogenous fiscal consolidation plans enacted by 17 OECD countries between 1978 and 2014 (Alesina et al., 2019; Devries et al., 2011), I test a number of hypotheses relating business experience to budget balancing policies. This paper extends the literature on the political economy of fiscal policies as well as the growing literature on individual leaders’ characteristics in several ways. Conceptually, I build on previous studies from the socio-psychological literature to develop a more complete theory of why one specific occupational experience – that of former entrepreneurs – is linked to deficit reduction and which type of deficit reduction we should expect. Methodologically, I move beyond previous studies on the effects of leaders on public debt by focusing on (weakly) exogenous fiscal consolidation policies, thus easing the endogeneity concerns that previous studies may be subject to. In a nutshell, the major findings can be summarized as following. First, politicians with prior business experience are more likely to pursue fiscal consolidation adjustments for the purpose of restoring a balanced budget. Second, they tend to announce plans that are predominantly based on spending cuts rather than tax increases. Third, they are more likely to opt for multi-year plans and they are more likely to plan deeper spending cuts further into the future.

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