Electoral Inefficiencies in Resource Allocation & the Demand for Bad Politicians

• In Event: Research on Elections and Methodology

Abstract

Perhaps the most celebrated result of neo-classical economics is a rigorous appreciation of the property of markets to allocate resources efficiently. However, when it comes to the way that the public sector allocates resources, our understanding is much less complete. Simply put, there is little (if any) consensus on the ability of representative democracy to produce efficient outcomes when it comes to allocating public resources. Moreover, there is even less consensus between different schools of thought (Chicago vs. Virginia) as to whether political (and electoral) competition will bring about efficient policy choices (in resource allocation) or whether "political failures" are pervasive. In this paper we answer to the following questions: Does the public sector (and in particular elected politicians who run it) allocate public resources efficiently or are “political failures” pervasive? Can intensified electoral (and political) competition restore efficiency in allocating public resources or not? If such inefficiencies are present, is it due “political failures” or are they demand (and voter) driven? We address these questions by building up a formal model of multi-district electoral competition where each district elects multiple members (via open lists) in the legislature (which votes for an allocation of public resources to the districts). We show that elected politicians (who respond to re-election incentives) face a trade-off between efficient allocation of public resources (which increases their party’s electoral performance) and constituency-specific (pork-barrel) spending within their district (which increases their own re-election probability within their party-list). We find that incumbent politicians (of the governing party) who respond to re-election incentives, generically, engage in inefficient allocation of public resources. Moreover, we show that increased (within party) electoral competition amplifies the inefficient allocation of public resources. We, then, test the predictions of our model, using quasi-random variation in parliamentary seat incumbency status. In particular, we make use of the 50-seat bonus that the electoral system in Greece gifts to the first party since 2007. In a quasi-random sample of districts, at least one of the seats is secured to the first party. Using both a matching and a difference-in-differences estimator, we estimate the causal effect that the presence an extra majority MP has on the amount of EU funds that are allocated to her constituency. We find a significant and positive effect –government MPs allocate disproportionately more EU funds to their constituencies. This finding is further amplified as intra-party electoral competition becomes more intense. That is, unlike the market set-up, in elective politics increased competition exacerbates –instead of mitigating- the inefficiency in allocating public funds. Further analyses, exploiting a novel and unique data-set where we have record the individual preference votes of each candidate within each party list, allow us to identify the source of this inefficiency: rather than being supply-driven, electoral inefficiencies are demand (and voter) driven. Voters systematically reward (by placing them higher within the party-list) candidates who engage in pork-barrel spending. That is, voters demand bad politicians (and “bad” policies). Our findings have two important implications: not only democratic (elective) politics result in inefficient allocation of public funds and resources but, in addition, due to the fact that such inefficiencies are demand-driven, intensifying the electoral and (political) competition can only make things worse.

Authors

• Elias Dinas, University of Oxford

• Konstantinos Matakos, King's College London