A Dynamic Model of State Budget Outcomes under Divided Partisan Government

This paper describes a model of partisan fiscal adjustment where policy is made in a bicameral legislature subject to a veto by an independent executive. We show how changes in fiscal policy depend not just on the configuration of parties, but also on veto institutions and on which party or parties was responsible for the previous budget. In our model, the legislative party is unable to shift fiscal policy all the way to its preferred point in one step, but can take advantage of repeated shocks to shift fiscal policy toward its preferred target slowly, probably over several budget cycles. We describe how legislatures can use shocks to shift expenditures and revenues and how this means that over time one can observe persistence of past partisan targets or slower and faster shifts toward new targets. We show also how the amount of change in policy should vary according to how control is configured and how patterns of control interact with institutions. Empirical sections of this...