THE IMPACT OF INSTITUTIONS UPON THE PATTERN OF PUBLIC EXPENDITURES

ROBERT WARD STONE, Purdue University

Abstract

This research explains and predicts local government expenditure patterns through systematic differences in institutional structures. The demand for a publicly produced good is developed in a majority voting setting under conditions in which the median voter result of simple majority voting is valid. The community's demand for the public good is represented by the median voter's demand. As a result, the median voter's constrained utility maximization problem determines the community's demand for the good. This maximization problem is constrained by the median voter's budget restraint and the political culture of the community. Political culture summarizes the collective community views of the appropriate roles for the institutions of government, bureaucracy, and politics. The level of the public good placed before voters and the point of intersection between the supply and demand of the public good is selected by a utility maximizing bureaucrat. This bureaucrat is the individual in charge of the department producing and delivering the public good. The bureaucrat's maximization problem is constrained by the bureaucrat's budget restraint, the department's balanced budget restraint, and an election restraint. The election restraint forces the bureaucrat's selection to be from the median voter's demand function. This assures voter approval. The resulting point of intersection between the supply and demand for the public good implies the observed public expenditure level in the community. Across different localities, all variables which enter the two maximization problems are held identical except political culture. If communities from the same political culture are examined, these identical maximization problems produce identical supplies, demands, points of intersection and observed expenditures on the public good. If communities from different political cultures are examined, the supplies of the public good are identical, but the demands, points of intersection and observed expenditure levels differ. Thus, public expenditure patterns follow the pattern of political culture. The empirical tests indicate that this is indeed the case. It can be concluded that the institutions summarized by political culture exert influence over the process of the production and delivery of public goods and the resulting public expenditure.

Degree

Ph.D.

Subject Area

Finance

COinS