Do Rich Countries Choose Better Governments?

Costas Azariadis and Amartya Lahiri

The B.E. Journal of Macroeconomics, 2002, vol. 2, issue 1, 1-39

Abstract: We analyze public investment in social infrastructure using a two-period model in which a government must intermediate all infrastructure investment. Voters choose a government from two alternative types, high quality and low quality. A high quality government obtains higher returns on infrastructure but also demands a bigger consumption payoff for intermediating investment, implying higher taxes for the voting public. We find that these intermediation costs cause threshold effects in the electoral process -- closed economies above a critical level of first period income elect high quality governments while economies below that level elect low quality ones. Thresholds vanish when voters can borrow abroad; capital mobility reduces the current consumption cost of infrastructure investment and favors better quality governments.

Date: 2002
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DOI: 10.2202/1534-6005.1051

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