Effects of Term Limits on Fiscal Performance: Evidence from Democratic Nations

Political reputation models feature forward-looking, rational voters who re-elect incumbents based on their estimate of an incumbent's ability level. Fiscal policy is one of the ways an incumbent establishes a reputation and thereby signals this ability level to voters. The reputation-building framework implies that term limits should affect fiscal performance; a term-limited incumbent places less value on reputation-building than an incumbent eligible for re-election does. We examine differences in fiscal performance in democratic countries under alternative executive term limit regimes. Our results generally agree with the prior findings of Besley and Case (1995a) who analyzed gubernatorial term limits in the American States. We provide new evidence that the fiscal effects of term limits differ under a two-term rule versus a single-term rule.