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.
Donald E. Stokes Professor of Public and International Affairs; Professor of Politics, Princeton University (email:
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28 See, for instance, the Gallup poll that asks, ‘Looking ahead, how much of a difference would this tax cut (you expected per year) make for you and your family – a big difference, some difference, only a little difference, or no difference at all?’ Gallup/CNN/USA Today poll, February 2001. Retrieved from the iPOLL Databank, The Roper Center for Public Opinion Research, University of Connecticut.
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30 Ansolabehere, ‘Guide to the 2008 Congressional Cooperative Election Study’.
31 The weighting does not significantly alter the distribution of respondents in each category. The largest change is a four-percentage point decrease in respondents who perceive the election to make some difference in their income; in all other categories, the weighting causes less than a three-percentage-point shift.
32 For the renovations-tax policy analysis, the coefficient and standard error were 0.124 (0.083) for party members and 0.236 (0.140) for independents. For the renovations-job security analysis, the coefficient and standard error were 0.272 (0.096) for party members and 0.116 (0.139) for independents.
33 Reichert, Alan K., ‘The Impact of Interest Rates, Income, and Employment upon Regional Housing Prices’, Journal of Real Estate Finance and Economics, 3 (1990), 373–91
34 For example, Albanese, ‘Texas’ Perry Signs School Finance Bill that Cuts Maximum Property Tax Rate’; ‘Governor Rendell: Record 588,638 Pennsylvanians Received Property Tax/Rent Rebates’.
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39 These states include AL, AZ, AR, CA, CO, CT, DE, FL, GA, HI, IL, IA, KY, MA, MD, MA, MI, MN, NE, NV, NH, NJ, NY, NC, OH, OK, OR, PA, RI, SC, VT, VA, WA, WV and WI. The data for Vermont span only four years.
40 An MSA is a population centre as defined by the US Office of Management and Budget. MSAs typically encompass multiple counties and/or towns.
41 Glaeser, Edward and Gyourko, Joseph, ‘Housing Dynamics’ (Cambridge, Mass.: NBER Working Paper No. 12787, 2006)
42 The government collects data on new home sales as part of the Survey of Construction, while the National Association of Realtors provides the data on existing home sales.
43 Stephens, William, Li, Ying, Lekkas, Vassilis, Abraham, JesseCalhoun, Charles and Kimner, Thomas, ‘Conventional Mortgage Home Price Index’, Journal of Housing Research, 6 (1995), 389–418
44 We have also analysed the almost identical index published by the Office of Housing Enterprise Oversight, and the results are similar. We use the CMHPI because it has larger coverage for some MSAs.
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.
46 Generally the two-party vote concerns Democratic and Republican candidates. However, the percentage is based on the two candidates with the largest vote shares, even in the unusual case in which one of them is a third-party candidate.
47 For instance, if we increase the threshold to an advantage of six or seven percentage points, all of the major results hold.
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49 Using the absolute level of real income rather than the percentage change does not alter the main findings, but does reduce the effect of income on housing market performance.
50 For example, Case and Shiller, ‘Is There a Bubble in the Housing Market?’.
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52 Kelly E. Grace, ‘US Foreclosures Jumped in March’, Wall Street Journal Online, 15 April 2009.
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57 Roodman, David, ‘A Note on the Theme of Too Many Instruments’, Oxford Bulletin of Economics and Statistics, 71 (2009), 135–58
58 If the income and unemployment variables are considered exogenous, then the Difference-in-Hansen test for the exogenous instruments suggests that one can reject at p = 0.03 the null that they are exogenous. Once income and unemployment are considered predetermined, the p-value for this test increases to p = 0.76.
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.
62 We tried reducing the lag structure so that it included only the second or third lag, and we even collapsed this lag, but the Hansen tests still suggested that the models were overidentifed.
63 For example, Poterba, ‘House Price Dynamics: The Role of Tax Policy and Demography’.
64 Beck, Thorsten and Levine, Ross, ‘Stock Markets, Banks, and Growth: Panel Evidence’, Journal of Banking and Finance, 28 (3), 423–42
65 The results on the key coefficients are also robust to increasing the number of lags used as instruments, but the Hansen tests recommend against these models.
66 For instance, if the only instrument is the collapsed second or third lag, then the Hansen J-statistic and Difference-in-Hansen test suggest the model is overidentified.
67 Haynes, Stephen E. and Stone, Joe A., ‘Political Parties and the Variable Duration of Business Cycles’, Southern Economic Journal, 60 (1994), 869–85
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* Donald E. Stokes Professor of Public and International Affairs; Professor of Politics, Princeton University (email: email@example.com) 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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