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Do Rich Countries Choose Better Governments?

Do Rich Countries Choose Better Governments? We analyze public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment. Voters choose a government from two alternative types, high quality and low quality. A high quality government obtains higher returns on infrastructure but also demands a bigger consumption payoff for intermediating investment, implying higher taxes for the voting public. We find that these intermediation costs cause threshold effects in the electoral process -- closed economies above a critical level of first period income elect high quality governments while economies below that level elect low quality ones. Thresholds vanish when voters can borrow abroad; capital mobility reduces the current consumption cost of infrastructure investment and favors better quality governments. We then study the choice of government when government actions are observable with "noise". Small amounts of noise have no effect on the choice of government type or on infrastructure provision. However, once the level of noise becomes large, the agency problem raises the cost of intermediation, reduces infrastructure provision, and biases elections toward low quality governments. Finally, we test the model with cross-country data and find preliminary empirical support for the principal results. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Do Rich Countries Choose Better Governments?

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References (16)

Publisher
de Gruyter
Copyright
Copyright © 2002 by the
ISSN
1534-6005
eISSN
1534-6005
DOI
10.2202/1534-6005.1051
Publisher site
See Article on Publisher Site

Abstract

We analyze public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment. Voters choose a government from two alternative types, high quality and low quality. A high quality government obtains higher returns on infrastructure but also demands a bigger consumption payoff for intermediating investment, implying higher taxes for the voting public. We find that these intermediation costs cause threshold effects in the electoral process -- closed economies above a critical level of first period income elect high quality governments while economies below that level elect low quality ones. Thresholds vanish when voters can borrow abroad; capital mobility reduces the current consumption cost of infrastructure investment and favors better quality governments. We then study the choice of government when government actions are observable with "noise". Small amounts of noise have no effect on the choice of government type or on infrastructure provision. However, once the level of noise becomes large, the agency problem raises the cost of intermediation, reduces infrastructure provision, and biases elections toward low quality governments. Finally, we test the model with cross-country data and find preliminary empirical support for the principal results.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Jun 5, 2002

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