Abstract
The article tackles the problem of the most important institutional determinants of public expenditures. Within the traditions of public choice and institutional economics, it tests several theories ranging from the fiscal commons framework, Political Business/Budget Cycle (PBC) and path dependence to veto players theory. Its novelty compared to previous research stems from an attempt to test several theories simultaneously, dealing with model uncertainty by using sensitivity analysis within the Bayesian Model Averaging framework with a vast prior structure in terms of model, g and multicollinearity dilution priors. The results confirm several hypotheses tested in the area of fiscal management across the recent decades within the group of developed economies, giving especially strong support to the tragedy of the fiscal commons and path dependence concepts, while only partial support to veto players theory. In contrast, explanations based on political budget cycle (PBC) theory are dismissed. Among other interesting findings reported in the study, Scandinavian countries turn out to be the most fiscally responsible when other institutional factors are taken into account. Similarly, contrary to other recent research into the issue of EU fiscal institutional framework, Euro area countries are characterized by limited public expenditures.
Highlights
The problem of explaining the differences in public expenditures and their dynamics among democratic states is an old one, dating at least a century with posing of so-called Wagner’s law [1]
The most prominent explanation for the differences in public expenditures is connected to the concept of the “tragedy of the fiscal commons” attributed to the problem first posed by Hardin [7] who tried to explain the overexploitation of common natural resources
There is no visible connection between the time left to the nearest elections and the volume of budget expenditures
Summary
The problem of explaining the differences in public expenditures and their dynamics among democratic states is an old one, dating at least a century with posing of so-called Wagner’s law [1]. The problem is important, as public expenditures are linked with the magnitude of public deficits and debts, and indirectly affect fiscal sustainability This issue in turn is still considered one of the most important problems with regards to risks of financial crises, it lost some prominence in recent years in favor of external imbalances of a country generally, regardless of the legal constraints put on many countries in terms of their fiscal flexibility or some cases in which the crisis is connected directly to the level of public debt-such as in Greece [2]. It seems that the “tragedy of the fiscal commons” (ToFC) approach is the one with strongest theoretical and empirical basis to date
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