The Political Economy of Public Expenditures

this paper, we review the theory and evidence on the impact of political market imperfections, and develop the implications of these findings for the structure and design of policy interventions meant to improve the allocation of resources. Political market failures in our analysis is reduced to three broad features of electoral competition---one, lack of information amongst voters about politician performance; two, social and ideological fragmentation amongst voters that leads to identity based voting and lower weight placed on the quality of public services; and three, lack of credibility of political promises to citizens. Informed voting is costly, and voters may have difficulty in coordinating information to reward (or punish) particular politicians or political parties for specific actions that improve (or worsen) the quality of public services. Similarly, socially and/or ideologically fragmented societies are less able to provide the incentives to their 1 According to the number of countries reported in the Database of Political Institutions as having competitive elections for executive and legislative office (EIEC and LIEC equal to seven). political agents to improve public services, because voting is more likely to occur along the dimension of identity and regardless of policies followed by elected representatives. Even if voters are informed and coordinated in focusing on specific policies, if political competitors cannot make credible promises prior to elections, incumbents are more secure from challenge and have fewer incentives to be responsive to citizens. If politicians are credible only to a few voters, with whom they can maintain clientelist relations, then public resources are allocated to targeted benefits for these "clients", instead of to broad publi..