Political Accountability for Public Spending

Abstract

This paper argues that legislative incentives to overspend are not confined to local public good provision, but also plague non-targetable (global) public good provision, such as public safety and public health. The channel for the second type of spending is different from the common pool logic, however. To identify this channel I model fragmentation of fiscal power in a political agency setup with legislative bargaining. First, legislators lack common pool incentives when benefits cannot be targeted. Second, fragmentation of agenda power in the legislature weakens voters' control over agenda setters by reducing the value of their office -- weak external accountability. This allows the government to initiate public projects with high unwarranted costs. Third, a check on their behavior is a larger number of legislators, creating internal accountability. I estimate the effects of fragmentation on budget performance by exploiting a state-mandated reorganization of Kentucky county governments at the end of the 1970s that substantially enhanced the power of the office of county executive. I present difference-in-differences estimates using a 1962-1997 panel that contains counties in the neighboring state of West Virginia as the control group. The results indicate that the centralization of executive power has led to significant reductions in several categories of county revenues as well as spending and in improvements in both budget balance and indebtedness position.