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The Elgar Companion to Public Economics

Empirical Public Economics

Edited by Attiat F. Ott and Richard J. Cebula

Attiat Ott and Richard Cebula have recognised the need to present, in an accessible and straightforward way, the voluminous literature in the public economics arena. Advances in econometric techniques and the spillover of knowledge from other disciplines made it difficult, not only for students but also for lecturers, to accurately find the information they need.
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Chapter 20: The Efficiency of Representative Democracy: A Comparative Study of Two Competing Models

Trufat Woldesenbet


20 The efficiency of representative democracy: a comparative study of two competing models Trufat Woldesenbet 1 Introduction One of the major issues in public economics deals with the allocation of society’s resources between the private sector and the public sector. Another major public economics issue concerns the allocation of public sector resources between productive investment type activity and distributional activity. For a given government size, a question that arises is how much politicians spend on productive public goods, and what factors influence behavior in the allocation of public sector resources. In this chapter, we empirically test two competing theoretical models, which aim at explaining the behavior of politicians in allocating public resources. The first model is that of McGuire and Olson (1996). The second is that of Besley and Coate (1997, 1998). McGuire and Olson’s (M-O) model posits that the encompassing interest of the ruling group influences public resource allocation. In democratic societies, because the ruling group (which is a political majority) has more encompassing interest in the prosperity of the economy, the tax rate and level of redistribution will be even lower in the absence of constitutional limits. From this, the proposition is derived that a democratic political system leads to the allocation of more public resources to productive investment activity than to distributional activity. An autocrat, on the other hand, has less encompassing interest that arises solely from his taxing ability. Thus, an autocrat sets the tax rate at a revenue-maximizing level and spends less...

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