Can Oil Windfalls Decrease Fiscal Accountability? Evidence From No-Term-Limit Regimes

We study the impact of oil windfalls on fiscal accountability, vis-à-vis the case of regimes with no term limits. A political economy model of oil windfalls, accountability and term limits indicates that term limit regimes distort the impact of windfalls on accountability, motivating a focus on regimes that impose no term limits. Employing a panel of US states with no term limits over the period 1963–2007, we show that oil windfalls trigger fiscal effects similar to those observed under binding term limits. Namely, taxes and spending increase, lowering state growth in a robust and economically meaningful magnitude, yet only when a Democrat is in office. We show that these patterns hold over the course of several years. Our results shed light on the potential adverse effects of oil windfalls in advanced democracies, as well as more generally on the disciplining effect of elections.