Empirical Public Economics
Edited by Attiat F. Ott and Richard J. Cebula
Chapter 20: The Efficiency of Representative Democracy: A Comparative Study of Two Competing Models
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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