The Political Economy of Fiscal Policy: An Experimental Study on the Strategic Use of Deficits

Field data on the strategic use of deficits to limit thebudgetary scope of future governments are inconclusive aboutthe effects of political polarization or a government'sre-election probability on fiscal policy. Therefore, wedesigned a controlled experiment to examine the strategic useof deficits. Using a within-subjects design, we find thatdeficits rise with a higher degree of polarization and a lowerreelection probability. However, in a between-subjects designneither polarization nor reelection probabilities have asystematic effect. We discuss the implications of ourexperimental results for empirical tests of the strategic useof deficits with field data.