Political Institutions and Policy Outcomes: What are the Stylized Facts?
ABSTRACT We investigate the effect of electoral rules and political regimes on fiscal policy outcomes in a panel of 61 democracies from 1960 and onwards. In presidential regimes, the size of government is smaller and less responsive to income shocks, compared to parliamentary regimes. Under majoritarian elections, social transfers are smaller and aggregate spending less responsive to to income shocks than under proportional elections. Institutions also shape electoral cycles; only in presidential regimes is fiscal adjustment delayed until after the elections, and only in proportional and parliamentary systems do social transfers expand around elections. Several of these empirical regularities are in line with recent theoretical work; others are still awaiting a theoretical explanation.
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ABSTRACT: Using a large sample of 3266 privatization transactions from 100 countries over the period 1977–2006, I test hypotheses on the political underpinnings of the choice of privatization method. After controlling for firm-level characteristics and cross-country legal institutions, I find that the political system's type, tenure, and cohesion explain the choice between privatizing with a share issue or an asset sale. My results are robust to a series of sensitivity tests and suggest that the government's choice of privatization method is politically constrained at different levels.Journal of Multinational Financial Management 01/2013;
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ABSTRACT: This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 25 EU countries over the 1980-2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that high concentration of parliamentary seats in a few parties would increase public spending volatility.Economic Modelling 11/2011; 28(6):2544–2559. · 0.70 Impact Factor
del Servizio Studi
Political Institutions and Policy Outcomes:
What are the Stylized Facts?
by Torsten Persson and Guido Tabellini
Number 412 - August 2001
ThepurposeoftheTemididiscussioneseriesistopromote the circulationofworking
papers prepared within the Bank of Italy or presented in Bank seminars by outside
economists with the aim of stimulating comments and suggestions.
The views expressed in the articles are those of the authors and do not involve the
responsibility of the Bank.
ANDREA BRANDOLINI, FABRIZIO BALASSONE, MATTEO BUGAMELLI, FABIO BUSETTI, RICCARDO
CRISTADORO, LUCA DEDOLA, FABIO FORNARI, PATRIZIO PAGANO; RAFFAELA BISCEGLIA
POLITICAL INST ITUTIONS AND POLICY OUT COME S: W HAT ARE T HE
by Torsten Persson∗and Guido Tabellini∗∗
in a panel of 61 democracies from 1960 and onwards. In presidential regimes, the size
of government is smaller and less responsive to income shocks, compared to parliamentary
regimes. Under majoritarian elections, social transfers are smaller and aggregate spending
less responsive to to income shocks than under proportional elections.
shape electoral cycles: only in presidential regimes is fiscal adjustment delayed until after
the elections, and only in proportional and parliamentary systems do social transfers expand
around elections. Several of these empirical regularities are in line with recent theoretical
work; others are still awaiting a theoretical explanation.
JEL classification: H0.
Keywords: comparative politics, constitution, fiscal policy, elections, democracies.
1. Introduction......................................................................... 7
2. Motivation .......................................................................... 9
3. Data ............................................................................... 14
4. Methodology ...................................................................... 20
5. Results............................................................................. 23
5.1 Size and surplus of government ................................................. 23
5.2 Composition of spending ....................................................... 34
6. Conclusion......................................................................... 36
Data Appendix ........................................................................ 39
Tables and figures ..................................................................... 41
References ............................................................................ 61
IIES, Stock ho lm University, London School o f Economics, CEPR and NBER.
∗∗IGIER, Univers ità Bocconi, CEPR and Ces-If o.
A recent literature on comparative politics has asked how political institutions might
shape economic policy. In particular, a number of theoretical contributions by economists
predict that electoral rules and political regimes systematically influence fiscal policy
outcomes: see Persson and Tabellini (2000) for a survey. But empirical work is still scant.
Whereas a large and interesting literature discusses how constitutional features of state and
local governments correlate with policy outcomes (see for instance Bohn and Inman, 1996,
Pommerhene, 1990, Feld and Matsusaka, 2000), only a few empirical studies have compared
fiscal policy in large samples of countries governed by different electoral rules or political
regime. Some recent exceptions are Poterba and Von Hagen (1999), Milesi-Ferretti, Perotti
and Rostagno (2000), and Persson and Tabellini (1999).2
Political scientists have done extensive empirical work on comparative politics for a
long time. But their focus has been on political phenomena, such as the number of parties,
the frequency of elections, or the attributes of governments under different constitutions,
and does not touch on fiscal policy. Castels (1998) and Lijphart (1999) are among the rare
exceptions, but their analyses are confined to correlations and bivariate regressions, relating
a few economic policy outcomes to constitutional features. As a result, very little is known
about whether and how fiscal policy varies across political institutions, particularly when the
analysis is extended to non-OECD countries.
We try to fill this gap. Specifically, we try to establish some stylized facts regarding the
mapping from electoral rules and political regimes to policy outcomes. We look exclusively at
the effects on fiscal policy: the size and composition of government spending and government
deficits. A companion paper (Persson, Tabellini and Trebbi, 2000) studies the incidence of
corruptionacrossdifferent political institutions. Whilesome ofourestimates aimat direct tests
WearegratefulforusefulcommentsfromAlbertoAlesina, Per-AndersEdin, FelixOberholzer-Gee, David
Strömberg, Jakob Svensson, and from participants in seminars at the Bank of England, Berkeley, Bonn, the
EuropeanCentralBank, Stanford,Stockholm, UCL,Uppsala, Warwick,andconferencesinToulouseandLugano.
We would also like to thank Christina Lönnblad for editorial assistance and Gani Aldashev, Alessia Amighini,
Thomas Eisensee, Giovanni Favara, Alessandro Riboni, and Francesco Trebbi for research assistance at various
stages of the project. This research is supported by a TMR-grant from the European Commission, and by grants
from Bocconi University, MURST, and the Swedish Council for Research in the Humanities and Social Sciences.
Tanzi and Schuknecht (2000) provide an extensive and detailed description of fiscal policy in a very large
sample of countries, but they do not ask how policy varies across constitutions.
of specific hypotheses, we also go beyond such tests in our search for systematic relationships
in the data.
The political constitution seems to matters a great deal for policy. We find striking
similarities between presidential regimes and majoritarian electoral rules. Both institutions are
associated with smaller governments, compared to parliamentary and proportional systems.
The quantitative effect is particularly large and robust for presidential regimes and for the
growth of government over time: towards the end of our sample, presidential regimes have
a smaller size of government of about 10 percent of GDP. How government spending
reacts to economic and political events is also systematically correlated with institutions.
Presidential and majoritarian systems react in a more dampened and less persistent fashion
to income shocks, compared to proportional and parliamentary systems. This could reflect a
different composition of spending (social transfer programs tend to be smaller in presidential
and majoritarian democracies), or a different response of the collective decision process
to changing economic circumstances. The peculiar dynamic and stochastic properties of
government spending are also reflected in budget deficits, which are smaller in absolute
value and react less to shocks in presidential and majoritarian democracies. Finally, electoral
cycles in fiscal policy are also institution-dependent. In all countries, tax revenue goes down
(as a fraction of GDP) at the time of the elections. But in presidential regimes, we also
observe spending cuts and painful fiscal adjustments postponed until after the election. And
in parliamentary regimes with proportional elections, social transfers are boosted before and
after the elections. While some of these findings are consistent with the predictions of existing
theories, others indicate interesting puzzles.
Section 2 provides a background, by sketching some of the main ideas in recent
theoretical work. Section 3 describes our data set, in which the measures of fiscal policy
outcomesaswellas political institutionsareclearlymotivatedbythetheory. Section4 explains
our statistical methodology. Section 5 presents our empirical results. Section 6 summarizes
our results and makes suggestions for future research.
Why would political institutions shape economic policy? The basic idea is that policy
choices entail conflicts among different groups of voters, between voters and politicians
(agency problems), and among different politicians. The way these conflicts are resolved,
and thus what fiscal policy we observe, hinges on the political institutions in place. Political
constitutions are like incomplete contracts. They do not impose specific policy choices.
Rather, they spell out how the “control rights” over policy are acquired through elections,
and how they can be exercised in the course of the legislature. Thus, which politicians get the
power to make policy decisions is determined by voters, but is crucially influenced by rules
for elections. Policy choices are made by elected politicians, but are crucially influenced by
rules for rule-making and legislation; that is, what political scientists call the regime type.
the consequences of these institutions for fiscal policy choices. It has focused on the level of
taxation and on the composition of spending, distinguishing between three types of programs:
(i) broad, non-targeted programs benefiting large groups of the electorate; (ii) narrow, targeted
programs benefiting small groups; (iii) programs benefiting mainly incumbent politicians.
Political institutions are modeled as the rules for a specific policy game, where voters elect
politicalrepresentativeswhointurntakedecisions onfiscalpolicy. Inthisliterature, alternative
constitutions amount to alternative rules for how to play this game and “comparative politics”
amounts to comparing equilibrium outcomes. Below, we describe the main ideas in a handful
of recent studies which have applied this comparative politics approach. We just outline the
results, emphasizing the specific predictions regarding the size and composition of public
spending. Interested readers can find the details in Persson and Tabellini (2000, Part III).
Legislative elections around the world differ in several dimensions. The political science
literature emphasizes two: district size and the electoral formula.3
District size simply
determines how many legislators acquire a seat in a voting district. The electoral formula
determines how votes are translated into seats. Under plurality rule, only the individual(s)
winning the highest vote share(s) get the seat(s) in a given district, whereas proportional
Other aspects of the electoral system that differ across countries include thresholds for representation and
the rules governing party lists. See e.g Cox (1997) and Blais and Massicotte (1996) for recent descriptions of
variations in electoral rules across countries.
representation (PR) instead awards seats to parties in proportion to their vote shares. Existing
theoretical papers have formulated specific predictions about the effects of district size and the
electoral formula on policy choices in political equilibrium.
Consider district size first. Persson and Tabellini (1999), (2000, Ch.8) predict
that it influences the composition of government spending. They study two party electoral
competition. Larger voting districts diffuse electoral competition, inducing both parties to
seek support from broad coalitions in the population. Smaller districts instead steer electoral
competition towards narrower, geographical constituencies. With small districts, typically a
party is a sure winner in some districts and a sure loser in others. Electoral competition is
thus concentrated only in some pivotal districts, and both parties have strong incentives to
target redistribution towards such districts. Clearly, broad programs are more effective in
seeking broad support and targeted programs more effective in seeking narrow support. An
example of spending that benefits broad coalitions and cannot easily target specific district is
welfare spending, which is thus predicted to grow with district size. Milesi-Ferretti, Perotti
and Rostagno (2000) reach a similar conclusion, but with a different reasoning. They argue
that with large electoral districts legislators mainly represent socio-economic groups in the
population, while with small districts they mainly represent groups in specific geographic
locations. Thus, with large electoral districts government policy targets powerful socio-
economic groups, while with small districts it targets powerful geographical groups.
How about the electoral formula? One effect of the winner-takes-all property of plurality
rule is to reduce the minimal coalition of voters needed to win the election. Under single-
member districts and plurality, a party can win with only 25 percent of the national vote:
50 percent in 50 percent of the districts. Under full PR it needs 50 percent of the national
vote; politicians are thus induced to internalize the policy benefits for a larger segment of the
population, which lead them to put stronger emphasis on broad programs than under plurality
(Lizzeri and Persico, 2000, Persson and Tabellini, 2000, Ch. 9).
The electoral formula matters for a second reason. Under plurality rule, voters choose
among individual candidates. Under PR, they choose among party lists. Such lists may dilute
the incentives for individual incumbents to perform well, because they entail a double layer
of delegation: individual legislators are accountable to parties, who in turn are accountable to
voters. Persson and Tabellini (2000, Ch. 9) examine the policy consequences in a Holmström
(1982)-style, career-concern models. They derive the predictions that opportunistic electoral
cycles, showing up in spending or taxes, are weaker under PR. The reason is that incumbents’
career concerns are stronger under plurality rule and are at their strongest just before elections.
Even though these two features of electoral rules have logically distinct consequences,
they are highly correlated across real-world electoral systems. Some systems can be described
as majoritarian, combining small voting districts with plurality rule. Archetypes here are
elections to the UK parliament or the US Congress, where the candidate collecting the largest
vote share in a district gets the single seat. Some electoral systems are instead decidedly
proportional, combining large electoral districts with proportional representation. Archetypes
are the Dutch and Israeli elections, where parties obtain seats in proportion to their vote shares
in a single national voting district. While we find some intermediate systems, most countries
fall quite unambiguously into this crude, binary classification.Fortunately, the different
predictions about composition above tend toreinforceeachother. Thus, proportional elections
– with larger districts and PR – should be associated with broader programs and larger welfare
states, and weaker electoral cycles.
A pitfall of the recent theoretical literature is that it has neglected the implications of the
electoral rule on the party structure. Many empirical contributions by political scientists deal
with precisely this aspect (see for instance Lijphart, 1994,1999), emphasizingthat majoritarian
elections are associated with a smaller number of parties. Electoral rules may thus also shape
policy indirectly, through the party structure. On the one hand, proportional elections entail
lower barriers to entry for new parties catering to specific groups of voters. On the other
hand, majoritarian (parliamentary) systems are more likely to produce single-party majority
governments, whereas coalition governments are more likely under proportional elections.
The likely consequences for economic policy have been stressed in several studies. First,
Austen-Smith (2000) takes party structure as exogenous, but assumes that fewer parties are
represented under plurality rule (two parties) than under PR (three parties). He then shows
that the interaction between elections, redistributive taxation, and the formation of economic
groups is likely to produce politico-economic equilibria with higher taxation under PR than
under plurality. Second, the common-pool problem in fiscal policy might be more pervasive
under coalition governments. Kontopoulos and Perotti (1999) have argued that this could lead
to larger government spending, and Scartascini and Crain (2001) provide further evidence
of this effect. Third, as coalition governments have more veto players, the status-quo bias
in the face of adverse shocks could be more pronounced (Roubini and Sachs, 1989, Alesina
and Drazen, 1991). Fourth, government crises are more likely and indeed empirically more
frequent under proportional elections, which could lead to greater policy myopia and larger
budget deficits (Alesina and Tabellini, 1990, Grilli, Masciandaro and Tabellini, 1991). Fifth,
large swings in the ideological preferences of governments as a result of the elections are less
likely under coalition governments. Alesina, Roubini and Cohen (1997) suggest that coalition
governments (and thus proportional elections)correlate withlesspronounced”partisan” cycles
after the elections. Not all these ideas have been fleshed out with the same analytical rigor as
in the more recent theoretical literature. But they can certainly suggest interpretations for the
empirical findings we report below.
Two crucial aspects of the legislative regime concern the powers over legislation: to
make, amend, or veto policy proposals. The first concerns the separation of those powers
across different politicians and offices. The second concerns the maintenance of powers; in
particular, whether the executive needs sustained confidence by a majority in the legislative
As in the case of electoral rules, real-world regimes fall quite unambiguously into a
crude two-way classification with regard to these aspects. Presidential regimes typically have
separation of powers, between the president and Congress, but also between congressional
committees that hold important proposal (agenda-setting) powers in different spheres of policy
(as in the US). But they do not have a confidence requirement: the executive can hold on to his
powers without the support of a majority in Congress. In parliamentary regimes the proposal
powers over legislation are instead concentrated in the hands of the government. Moreover,
the government needs the continuous confidence of a majority in parliament to maintain those
powers throughout an entire election period.
Why should separation of powers matter for policy?A classical argument is that
checks and balances constrain politicians from abusing their powers. Persson, Roland, and
Tabellini (1997, 2000) formally demonstrate this old point in models where incumbents are
held accountable by retrospective voters. The upshot is that we should expect weaker political
accountability in parliamentary regimes, resulting in higher rents and higher taxes.
The confidence requirement has other effects. Parties supporting the executive hold
valuable proposal powers which they risk losing in a government crisis.Therefore, a
confidence requirement creates strong incentives to maintain a stable majority when voting
on policy proposals in the legislature. The absence of a confidence requirement instead leads
to more unstable coalitions and less discipline within the majority.
Building on this idea of “legislative cohesion”, due to Diermeier and Feddersen (1998),
Persson, Roland and Tabellini (2000) derive two additional predictions. In parliamentary
regimes, astablemajorityof legislators tends to pursuethejoint interest of its voters. Spending
in parliamentary regimes thus optimally becomes directed towards broad programs that benefit
a majority of voters, such as social security and welfare spending. In presidential regimes,
instead, the (relative) lack of such a majority tends to pit the interests of different minorities
against each other for different issues on the legislative agenda. As a result, the allocation of
spending targets powerful minorities, typically the constituency of the powerful officeholders
such as the heads of committees in Congress. In parliamentary regimes, the stable majority
of incumbent legislators, and its voters, become prospective residual claimants on additional
revenue. Both favor high taxes and high spending. In presidential regimes, on the other hand,
majorities are not residual claimants on revenue and therefore resist high spending. These
forces produce larger governments (higher taxes) and broader social transfer programs in
Let us summarize the main predictions with the help of Table 1. According to the theory,
presidential regimes have smaller governments than parliamentary regimes and less spending
on broad social security and welfare programs. Under majoritarian elections, we should
observe less spending on broad social security and welfare programs than under proportional
elections. The common-pool argument (and the model suggested by Austen-Smith, 2000)
suggests that the electoral rule could also matter for the size of government, with proportional
elections associated with bigger governments. These are all cross-sectional predictions, in that
they have been derived by comparing equilibria in static models.
Some of the theoretical ideas summarized above also have dynamic predictions. Models
stressing the greater status-quo bias and myopia of coalition governments would predict that
proportional-parliamentary systems have larger steady-state debts, and – during the transition
– larger budget deficits. The stronger incentive to perform under majoritarian elections suggest
that majoritarian-parliamentary countries might have more pronounced electoral cycles than
proportional-parliamentary countries. We have no theoretical prior about deficits and electoral
cycles in presidential regimes. Similarly, to derive specific implications about the reaction to
shocks under thesesystems, one would needa more precise dynamicmodel, including detailed
assumptions about status-quo policy.
In putting our data set together, we have relied on the theory described in Section 2
for the measurement of political institutions and fiscal policy outcomes. Data availability
also determines the sample, which comprises yearly data for 61 countries over almost four
decades (1960-98). This panel includes a large number of economic, social and political
variables. Because of missing data and our rules for sampling (described next), however, it
is an unbalanced panel. The sources for all the data used in the paper are listed in the Data
The theory suggests that we should confine our study to countries with democratic
political institutions. Here, we have relied on a well-known classification by Freedom House.
values being associated with better democratic institutions.4To assess a country’s democratic
status in a particular year, we took the average of these two indexes. The Gastil indices are
available annually, from 1972 and onwards. For the earlier period, we follow Barro (1998) and
rely on a measure compiled by Bollen (1990), available every five years (which we re-scaled
onto a scale from 1 to 7).
We use three different rules for including countries in the sample, and we report results
for all three samples. The most permissive one is to include a country from the point in time
when it first obtains a Gastil-score of 5 or lower, but not exclude it from the sample in the
wake of a temporarily higher score reflecting restricted democratic rights. This rule permits
a maximum of 61 countries in the sample. We refer to this sample of countries as the Broad
According to the index, countries scoring 1 or 2 are “free”, countries scoring from 3 to 5 “semi-free”,
while countries scoring 6 or 7 are “non-free”.
sample. Our Default sample relies on a more restrictive rule, namely to exclude a country
from the sample in any year when it has a Gastil score of 3.5 or lower. This rule cuts the
number of annual observations in the panel by about 350. As an example, the more restrictive
rule temporarily excludes countries like Turkey (intermittently) and Argentina (in the 80s)
after their first entry into the panel. A yet more restrictive rule identifies a Narrow sample as
those countries and years where the Gastil score is less than or equal to 2. Here we lose many
more observations, particularly in the early part of the sample, since we are really restricting
attention to well functioning democracies. As in the Default sample, a few countries enter
and exit from the sample at different points of time. Throughout, we treat these censored
observations as randomly missing and do not attempt to model sample selection. The three
samples are listed in Table 2, along with our classification of regime types and electoral rules
(see the next subsection). As an example, Chile enters the Broad sample for the full sample
period, exits from the Default sample between 1974 and 1988, and is only included in the
Narrow sample from 1991 and onwards.
Which political institutions?
Following the theoretical discussion in Section 2, we classify electoral rules and regime
types by means of two indicator (dummy) variables: MAJ and PRES. Majoritarian countries
(MAJ = 1) are those that relied exclusively on plurality rule in its previous most recent election
to the legislature (lower house), the others are proportional (MAJ = 0). Relying on district size
rather than the electoral formula would produce a similar but not identical classification.5In
some sensitivity analysis, not reported below, we have also allowed for a finer partition that
discriminates between three types: majority, proportional and mixed systems. But when it
comes to the effect on fiscal policy outcomes, the effects of mixed and proportional systems
appear to be similar.
With regard to regime type, we classify as presidential (PRES = 1) countries where
the executive is not accountable to the legislature through a vote of confidence, and those
where it is as parliamentary (PRES = 0). Thus, we try to capture the institutions producing
stable legislative majorities, as discussed in Section 2. (We have not tried to classify countries
on the basis of the checks and balances entailed in the separation of powers granted by their
Persson and Tabellini (1999) rely on district size, classifying all countries with an average district size
below two (seats per district) as majoritarian, others as proportional.
constitutions.) In building this index we had to assess whether or not the office of the President
has executive powers in the realm of fiscal policy. If not, and if the government is instead
accountable to Parliament through a confidence requirement, the country is classified as a
parliamentary regime. In evaluating the executive powers of the President, we mainly relied
on Shugart and Carey (1992).
There are very few changes over time in these classifications (PRES does not vary at
all, whereas MAJ displays time variation in France (which had a brief period of proportional
representation in 1985-86) and in Cyprus only. This stability reflects an inertia of political
institutions sometimes called an “iron law” by political scientists. The lack of time variation is
unfortunate in that it provides us with almost no “experiments” in the form of regime changes.
But it is also an indication that it may be correct to treat institutions as given by history, and
not influenced by reverse causation going from policy outcomes to institutions.
Figure 1 illustrates the institutional variation across countries in 1995. The colored
portions of the map represent the 61 countries inthe sample. Striped areas indicate presidential
regimes (PRES = 1), solid areas parliamentary regimes (PRES = 0). Darker shade indicates
majoritarian elections (MAJ = 1), lighter shade proportional elections (MAJ = 0). The least
common system is the US-style (gray striped) combination of a presidential regime with
majoritarian elections, with only five countries. But each of the other three combinations
is well represented in the sample. In the last two columns of Table 2, we report the values of
MAJ and PRES (averaged over time) for all the countries in our samples.
As the map illustrates, using theory in the classification sometimes produces results
contrary to popular perception. According to our classification, parliamentary regimes include
France, Portugal and Finland, with a directly elected president, but where the government
is accountable to the elected assembly and the president has no or little executive powers
over fiscal policy. Conversely, the presidential regimes include Switzerland, where there is no
popularly elected president but the permanent coalition executive cannot be brought down by
the legislative assembly.6
Even a cursory look at the map reveals that our institutional classification does not
produce a random outcome. The electoral rule does not exhibit a particular pattern in terms
The Swiss constitution indeed resembles the US constitution in many respects beyond the absence of a
of development, but most Anglo-Saxon countries and countries of British colonial origin
have MAJ = 1 while most of Europe and South America has MAJ = 0. Presidential
regimes are largely confined to non-OECD countries (among the OECD-countries, only the
US and Switzerland have PRES = 1). Moreover, many presidential regimes happen to
be in Central and South America, though the sample also includes several non-presidential
Caribbean countries. Other presidential regimes are Nepal, the Philippines, and Senegal.
This non-random pattern of constitutions in our sample raises a fundamental question:
canwe really treat theconstitution as exogenous intheempirical analysis that follows?It could
very well be that countries self-select into constitutions on the basis of historical variables and
collective preferences that also influence policy decisions. To take care of this problem, in
the regressions reported below we try to control for a large set of historical and geographical
variables that might also explain the constitutional origin of a country. But in this paper we do
not seek to explain the constitutional choice itself. In a companion paper (Persson, Tabellini
and Trebbi, 2000), however, we also rely a non-parametric estimator that explicitly allows for
endogenous selection of countries into alternative electoral rules.
Which fiscal policy outcomes?
We include fiscal-policy outcomes as suggested by the theory. Thus, we measure the
size of government mainly by the ratio of central government spending (inclusive of social
security) to GDP, expressed as a percentage (CGEXP). But we have also looked at central
government revenues and at general government spending, both as a percentage of GDP. For
the composition of government spending we use two measures: social security and welfare
on goods and services (SSW/GDS). The presumption is that broad transfer programs, like
pensions and unemployment insurance, are much harder to target towards narrow geographic
constituencies compared to spending on goods and services. Finally, we look at the size of the
budget surplus of the central government, as a percent of GDP (SURPLUS).
The measures of size and deficits are available for most OECD countries for the entire
period 1960-1998. For many developing countries availability is limited to the period from
the 1970s and onward. Similarly, the measures of the composition of spending do not become
available until the early 1970s. The statistical source for all these variables is the IMF. For
the size of government, budget deficits and debts, we rely on IFS data which is available for a
longer time series. General government spending and the composition of spending are instead
extracted from the GFS database.
These policy measures vary a great deal, both across time and countries. As an
illustration consider Figure 2, which shows the size of government as measured by central
expenditures in our sample. In the figure, we see that government expenditure in a typical year
ranges from below 10 percent of GDP to above 50 percent. We also see how the distribution
drifts upwards over time, reflecting growth in the average size of government – the curve in
the graph – by about 8 percent of GDP from the 1960s to the mid 1990s. Most of this growth
takes place in the 1970s and 80s.
Our measures of the composition of spending also show a wide distribution where
spending on social security and welfare drifts upwards at least until the mid 1980s. The
deficits are also widely distributed across countries, with average deficits having their peak
in the period from the mid 70s to the mid 80s.
Given that we mainly rely on central government spending in our analysis, a natural
question is whether this matters. Suppose, for instance, that presidential regimes were more
decentralized than parliamentary regimes. By looking at central government spending only,
we might than mistakenly interpret a lower size of central government in presidential countries
as due to the regime type, while it could simply reflect their lower degree of centralization.
Fortunately, however, centralization of spending is not systematically correlated with the
political constitution, at least in the 41 countries and in the years were data on both levels
of government are available - see the last subsection below.
Which socio-economic controls?
The theory we have surveyed in Section 2 should clearly be understood as providing
ceteris paribus predictions about fiscal policy. Therefore, we control for other variables likely
to shape government outlays and revenues. Specifically, we always include in our regressions
the level of development, measured by the log of real per capita income (LYH), a measure of
openness (TRADE), defined as exports plus imports over GDP, and two variables measuring
the demographic composition, defined as the percentages of the population between 15 and 64
years of age (PROP1564), and above 65 years of age (PROP65), respectively. These variables