The Fiscal Benefits of Repeated Cooperation: Coalitions and Debt Dynamics in 36 Democracies

Standard fragmentation and veto-player models of fiscal policy implicitly attribute short time horizons to coalition governments, leaving them unable to internalize the full costs of individual parties’ spending preferences. Recent insights from the coalition formation literature, however, posit that coalitions are likely to cooperate repeatedly in the government coalition when they have built up a high level of familiarity through shared governing experience in the past. Such coalitions with a high potential for future cooperation should care about the future costs of indebtedness. They should have incentives to reach credible agreements that balance spending demands and favor of cost sharing, thus ending up with lower debt increases. Empirical support for this argument is mobilized in a comparison of 36 OECD/EU democracies between 1962 and 2013. Using ‘autoregressive distributed lag’ regression models allow distinguishing short- and long-run impacts on the dynamics of government debt. Especially in the long term, coalitions’ prospective cooperation is associated with lower debt increases. In addition, analyses with time-varying parameters show that the relative magnitude of cooperation effects has declined since the 1990s, as the political capacity for aggregate demand management has declined. The results shed some light on the conditions under which political parties in government can employ longer time horizons with regard to fiscal policies. Cooperation can be a feasible strategy to overcome some of the opportunity problems that political actors face because of insecurity over future events, which might therefore also be applicable to other public policy areas such as welfare state policies.