Empirical Public Economics
Edited by Attiat F. Ott and Richard J. Cebula
Chapter 13: Fiscal Policy and Direct Democracy: Institutional Design Determines Outcomes
Lars P. Feld and Gebhard Kirchgässner* 1 Introduction Whether institutions matter for economic policy outcomes is much debated among economists. Based on the arguments by North (1981, 1990), political institutions, as part of the formal and informal rules that protect property rights, are considered to shape economic performance of jurisdictions. Acemoglu, Johnson and Robinson (2004) for example argue that economic (and political) freedom is a precondition to private investment in physical as well as human capital, and thus to innovations and technological progress. Proper governance hence causes economic growth. Glaeser et al. (2004) question the proposed causal relationship by contending that institutions cannot have a positive impact on economic outcomes unless citizens have developed the human capital to arrive at reasonable policy choices. Moreover, the concepts of economic and political freedom as well as their measurement are much too imprecise to obtain conclusive evidence on the impact of institutions on economic performance. Glaeser et al. (2004) suggest that the constitutional or legal provisions in different countries need to be investigated in order to ﬁnd out whether institutions matter at all. Feld and Voigt (2003, 2006) follow that suggestion and emphasize the role of the judiciary in protecting private property rights. They report evidence for a sample of 73 countries that a higher de facto independence of the highest (constitutional) court increases economic growth. De facto judicial independence is measured by the constitutional provisions for the judiciary in the different countries and the extent to which the political system in...
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