Nota di Lavoro, Fondazione Eni Enrico Mattei 3. 2000
The levels of public goods provided by government are determined in part by the form of political institutions in a country. Countries governed by democratic institutions arguably will provide public goods at different levels than countries ruled by autocrats or an elite group. To examine this proposition, the present paper develops a simple neoclassical theory of public good provision that allows for different political institutions. Differences in government form are based on a concept of inclusiveness. A government's structure of governance is inclusive if it takes into account the costs and benefits of the entire population when deciding public good levels. A less than inclusive government considers only the costs and benefits accruing to a subset of the population. Under plausible conditions the theory implies that public consumption goods, those that affect individual utilities directly rather than entering production functions as inputs, will be underprovided by less inclusive governments (similar to Mancur Olson and Martin McGuire.) This theory is tested with cross-country data on forms of government and provision of public goods. The provision of environmental public goods (the availability of safe water and sanitation facilities and regulations on the lead content of gasoline) is emphasised, though provision of public schooling and roads is also examined. The form of government is represented by combining data on the method of selecting government executives and representatives, the degree of power exercised by the legislature vs. the executive, the degree to which nominating processes are competitive, the practice of excluding political groups and parties, and other criteria. The empirical estimates are consistent with the theory, indicating that (after controlling for differences in income and other factors) the least democratic governments in the sample provide public goods at levels 30%-60% below the most democratic governments.