Graduation Year

Spring 2014

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Cameron Shelton

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© 2014 Nathan Reed Falk

Abstract

For almost 40 years, scholars have sought to determine how elections affect the economy. Recently, certain studies have focused on the effect of political uncertainty on the economy. This paper focuses specifically on the effect of political uncertainty on business investment. We use 30 years of data from the U.S. states to show that policy uncertainty leads to significant declines in business fixed investment, sometimes referred to as “irreversible investment.” Moreover, we find that the magnitude of the decline in investment depends on the level of policy uncertainty. These results support predictions for “Electoral Investment Theory” and the existence of reverse political business cycles more generally.

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