Political forecast cycles

A moral hazard model is used to show why overly optimistic revenue forecasts prior elections can be optimal: Opportunistic governments increase spending and appear more competent; ex post deficits emerge in election years, thereby producing political forecast cycles – as also found for US states the empirical literature. Additionally, we obtain three theoretical results which are tested with panel data Portuguese municipalities. The extent of manipulations reduced when (i) winning margin expected widen; (ii) incumbent not re-running; and/or (iii) share informed voters (proxied by education) goes up. • use elections. Increased leads budget cycles. We find evidence municipalities (as previously states). Less manipulation sure win or re-running. More less informed.