Autori
Maffioletti, Anna
Santoni, Michele

Titolo
Ambiguity and partisan business cycles
Periodico
International Center for Economics Research, Torino. ICER - Working papers series
Anno: 1999 - Fascicolo: 19 - Pagina iniziale: 1 - Pagina finale: 29

We introduce ambiguity (Knightian uncertainty) into a down-stripped version of Alesina's (1987) partisan model of the business cycle. We show that, if the private sector's subjective expectations of future events are ambiguous, there is the possibility of a political business cycle, even when the parties running for the election have similar preferences for inflation and unemployment. In particular, if inflation is perceived as a loss, the larger is the fraction of the population that is ambiguity prone (adverse), the larger is the post-election boom (slump), with unemployment then returning back to its natural level. We also show that, for given parties' preferences, ambiguity preference (aversion) implies smaller (larger) fluctuations in the level of unemployment around its natural level, when the right-wing party wins the elections. Finally, we design an experiment that measures the attitude towards ambiguity of a small sample of Italian trade-union delegates. If the probability of the election outcome is uniformly distributed over the unit interval, it turns out that the ambiguity-neutral behaviour is prevalent among the wage-setters on average.



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