The Partisan Politics of Rainy Day Fund Investment

ABSTRACT When do legislatures save for disasters and economic downturns? How do electoral uncertainty and majority party agenda control influence these decisions? I develop a two‐stage bargaining model of rainy day fund (RDF) investment. In the first stage, a legislator from the majority party proposes an allocation of the budget between an RDF, particularistic good, and public good. Before the second stage, there is an election and an economic crisis may occur. If a crisis occurs, the legislature can access an existing RDF to fund relief. The model predicts that a majority party is more likely to save when it is likely to remain in the majority, though saving remains below socially optimal levels. Supermajority and other requirements for larger voting coalitions incentivize RDF investment. Testing the results of the model empirically using measures of partisan competition reveal that states with stronger majorities are more likely to invest in their RDFs.