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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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Strategic Use of Debt in Flemish Municipalities

Stijn Goeminne1 / Carine Smolders2

1University College Ghent,

2University College Ghent,

Citation Information: The B.E. Journal of Economic Analysis & Policy. Volume 10, Issue 1, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.2097, July 2010

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This paper discusses the literature on strategic use of debt models and tests the seminal models of Persson & Svensson (1989) and Alesina & Tabellini (1990) on a dataset of Flemish municipalities. The literature on strategic deficit and debt behaviour originates from the question whether or not incumbent policymakers run higher budget deficits than they would if they were confident of re-election. In this paper, we introduce a vote function to estimate the probability of electoral defeat and present evidence of strategic debt in line with Persson & Svensson (1989), but only for leftist governments with expected vote percentages below 49%. There is no indication that rightist governments without re-election prospects are sensitive to strategic debt behaviour.

Keywords: strategic debt; expectation of electoral defeat; vote function; Flemish municipalities

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