Elections, Uncertainty and Irreversible Investment

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.