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Elections, Uncertainty and Irreversible Investment

Published online by Cambridge University Press:  31 October 2012

Abstract

This article argues that the policy uncertainty generated by elections encourages private actors to delay investments that entail high costs of reversal, creating pre-election declines in the associated sectors. Moreover, this incentive depends on the competitiveness of the race and the policy differences between the major parties/candidates. These arguments are tested using new survey and housing market data from the United States. The survey analysis assesses whether respondents’ perceptions of presidential candidates’ policy differences increased the likelihood that they would delay certain purchases and actions. The housing market analysis examines whether elections are associated with a pre-election decline in economic activity, and whether any such decline depends on electoral competitiveness. The results support the predictions and cannot be explained by existing theories.

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Articles
Copyright
Copyright © Cambridge University Press 2012 

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Footnotes

*

Donald E. Stokes Professor of Public and International Affairs; Professor of Politics, Princeton University (email: bcwrone@princeton.edu) and Assistant Professor of Methodology and American Politics, American University in Cairo. Previous presentations at Caltech, George Mason, Georgetown, Michigan, Princeton, Rutgers, Yale and the 2009 Midwest Political Science Meetings and the 2009 American Political Science Association Meetings have substantially improved this project. We are also grateful to Larry Bartels, Paul Brady, Will Bullock, Peter Buisseret, John Cogan, Hank Farber, Marty Gilens, Jason Kelly, George Krause, Adam Meirowitz, Mike Munger, Tom Romer, Harvey Rosen, Ken Shotts and Erik Snowberg for helpful comments and conversations. An online appendix is available at http://dx.doi.org/10.1017/S00071234.

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45 A working paper by Justin Wolfers argues that home prices reflect voters’ future economic expectations. We considered potential implications of this interpretation of home prices, particularly the possibility that the findings could be driven by bad economic conditions that weaken voters’ economic expectations. Accordingly, we examined whether the findings held when personal income growth was higher than the median level. The results were robust to examining this subsample. For instance, the coefficient and standard error on Gubernatorial Election Year are −0.354 (0.181) for the fixed-effects estimation of Equation 1. Justin Wolfers, ‘Are Voters Rational? Evidence from Gubernatorial Elections’, Wharton Business School manuscript, 2007.

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59 Roodman, ‘A Note on the Theme of Too Many Instruments’, p. 142, 151.

60 The coefficients are similar in magnitude to those in Table 6 from difference-GMM and are significant at p < 0.05, two-tailed, except one case in which the significance level is p = 0.07, two-tailed.

61 In the model that estimates the average effect of a gubernatorial election year, the p-value from the Difference-in-Hansen test is p = 1.00 and from the Hansen J test is p = 0.982. In the model that estimates the effect of competitiveness, the p-value from both the Difference-in-Hansen and Hansen J tests is p = 1.00.

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Supplementary material: File

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Appendix

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