Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I say who wrote them.
Peltzman. 1987. Economic conditions and gubernatorial elections. American Economic Review 77.
Voters do hold governors accountable for economic conditions, but surprisingly, they hold them accountable for national economic trends, not local ones. Since most gubernatorial elections are held concurrently with midterm Congressional elections, this finding suggests that voters use these midterm elections to send a message to the White House, demanding that it change its ways before the next presidential election.
Peltzman uses data from 269 postwar gubernatorial elections, which excludes a few one-party states and states that don't have four-year terms for the governors. Conceptually, the empirical model uses (X1) the electorate's predisposition to vote for a governor and (X2) changes in voters' economic welfare to predict (Y) the gubernatorial vote share. Operationally, it looks something like this:
Peltzman measures per capita income growth (over the 12 months prior to the election) at both the state and the national level. At the national level, this is interacted with a presidential dummy (+1 if the governor belongs to the president's party, -1 otherwise). In regressions 1 and 2, Peltzman finds that the state-level data doesn't seem to matter much, nor does the difference between state and national growth. Voters are rewarding/punishing governors for national economic conditions. Interestingly, challengers from the president's party profit more from economic growth than incumbents do.
In regressions 3 and 4, Peltzman adds a measure of the change in the (national) inflation rate, also interacted with the presidential dummy. This variable has borderline significance (primarily in the interaction, suggesting that challengers and incumbents from the president's party get roughly the same advantage).
Peltzman also tries using unemployment data (no results given), which yields no advantage over the data presented.
The only state-level variable that has an effect is a measure of the state budget. When governors expand the state budget (relative to personal income levels), voters punish the governor slightly.
Voters "vote as if they understand that national rather than local policies have the dominant effect on their income. . . . They do this, on the evidence here, by holding gubernatorial candidates of the president's party hostage to the perceived effectiveness of his macro policy and by ignoring local idiosyncrasies."
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