When Government Spending Serves the Elites: Consequences for Economic Growth in a Context of Market Imperfections

Abstract

Government spending should be regarded as a social and political phenomenon, not merely as a technical choice. We argue that there is an implicit contract between the organized elites and politicians which often leads to a pro-elite allocation of public resources. A natural and simple taxonomy of government spending follows from this view: spending in public goods broadly defined which mitigate market failures versus spending in non-social subsidies, mainly a vehicle to serve the elites. We theoretically and empirically show that pro-elite spending biases are costly in terms of economic growth. The empirical findings are exceptionally robust.government spending, economic growth, market imperfections, investment, subsidies, International Development, Labor and Human Capital, Political Economy, Public Economics,